Blog posted On September 11, 2018
Last month, ATTOM Data Solutions released a report showing 24.5% of all mortgaged properties were equity rich in Q2 2018. “Equity rich” is defined as a home with a loan-to-value ratio of 50% or lower. Collectively, American homeowners have accrued over $15 trillion in home equity, over a trillion and a half dollars more than the highest levels before the recession. What are they doing with it?
Despite record-high equity, the percentage of homeowners tapping into their equity is historically low. Home equity lines of credit have become synonymous with the Financial Crisis in 2008 and 2009. Lenient lending standards and careless behavior resulted in many homeowners tapping into home equity they would be unable to pay back. As the economy recovered, lending standards improved, and home prices appreciated, home equity has risen exponentially. ATTOM Data Solutions senior vice president, Daren Blomquist, explains, “nationwide the number of equity rich homeowners is more than twice the number of seriously underwater homeowners.”
Some of the most equity rich properties are located in states and cities that are also experiencing the most rapid home price appreciation. ATTOM Data Solutions reports, the metropolitan areas with the highest shares of equity rich properties are San Jose, California (71.9%); San Francisco, California (60.8%); Los Angeles, California (47.9%); Seattle, Washington (41.1%); and San Diego, California (40%).
Homeowners can tap into home equity through a cash-out refinance or home equity line of credit. In the case of a cash-out refinance, the homeowner takes out a new loan on their home, including the existing mortgage balance plus the equity they wish to withdraw. Keep in mind, a cash-out refinance is a new mortgage and will come with closing costs and other origination fees. When a homeowner takes out a home equity line of credit, they are taking out a second mortgage, borrowing against the home equity, then repaying the loan.
Most lenders recommend keeping at least 20% equity in your home before withdrawing through a cash-out refinance or home equity line of credit. Proceed with caution, not all financial needs require tapping into home equity. Using home equity for a fleeting adventure, like a lavish vacation, may not be wise, but using home equity to reinvest in your home could improve the value, and eventually generate more equity. Chief financial analyst for Bankrate.com, Greg McBride notes, “using home equity to get debt under control could be advantageous because it’s possible to reduce interest costs and speed up debt repayment, but it’s going to require a lot of discipline, and you’re also going to have to have identified and solved the problem that produced the debt in the first place.”
Some of the most popular uses of home equity are home additions or improvements, consolidating debt, paying medical expenses, or other real estate investments. If you are a homeowner considering a cash-out refinance or home equity line of credit, consult a mortgage professional or financial advisor to review your goals and determine if home equity is the best way to afford them.