A couple in Austin, Texas, is using the money to fix up a rental house they own and help pay for their three young kids to attend Montessori school. A cop in Florida is playing the stock market. Others just like knowing there’s cash available if an emergency expense pops up.
Welcome to the 2023 HELOC boom.
Americans are increasingly tapping their greatest source of wealth, getting home equity lines of credit to borrow against the value of their properties, which skyrocketed in the pandemic real estate rally. HELOCs have become more popular as mortgage rates surged from record lows, making cash-out refinancing unattractive to most homeowners.
Ross and Sarah Ponder bought a house in Austin in 2018 for $560,000. Four years later, after COVID migration made the Texas capital one of the hottest markets in the country, the place was worth $1 million. With three kids ages 5 and under, the Ponders decided in March 2022 to take out a HELOC of $237,500.
They had recently closed on an investment property, and the cash helped them make repairs and pay their kids’ tuition. They also found peace of mind knowing they had a little extra money around.
“It’s important for us to have options for getting money in a crisis,” said Ross Ponder, a 39-year-old real estate agent. “And it lets us keep our liquid cash liquid, which we prefer.”
In recent years, lenders scarred by the financial crisis kept a tight grip on HELOCs, considered relatively risky for banks because the credit line functions as a “second lien” that’s paid off after primary mortgage obligations. But 30-year loan costs at almost double early 2022 levels have squashed the refi boom, making financial institutions more open to HELOCs, said Greg McBride, chief financial analyst at Bankrate.com.
“The phones in the mortgage refinance department aren’t ringing,” he said. “The way to get equity out of the home has swung to the HELOC.”
Typically, there’s an upfront fee for opening a HELOC, but interest doesn’t accrue until the funds are used. And for homeowners sitting on a mountain of equity, it can end up being a costly option. The rates are often variable, determined by broader lending conditions, meaning the Federal Reserve’s aggressive inflation-fighting campaign can increase costs for borrowers. The Ponders, for instance, had a 7% interest rate when they got their HELOC, and it has since jumped to 8.7%.
Still, it’s a way for people who have seen the value of their homes increase to get access to cash, especially for those who missed the refinancing boom when borrowing costs were low during the pandemic. In 2022, annual HELOC originations rose 34% from the prior year to 1.41 million individual loans. That was the highest total since 2008, according to the credit reporting agency TransUnion. And while 2023 figures aren’t yet in, the number of HELOC accounts has risen in each of the past three quarters for which data is available.
Real estate prices have cooled slightly from the boom days, but most U.S. homeowners have seen their properties appreciate rapidly, especially in popular spots such as Texas and Florida. Americans collectively had $28.7 trillion worth of home equity at the end of the first quarter, according to Black Knight Inc. That was down from the record high in the second quarter of 2022 but up from $20 trillion at the beginning of 2020.
Meanwhile, tappable equity — the amount available to lend or borrow against while keeping a 20% equity cushion — is at $9.3 trillion, up 56% over a three-year period.
LOOKING FOR OPPORTUNITIES
Jon Buck’s home in a suburb outside Indianapolis has nearly doubled in value since he and his wife bought it for $400,000 in 2014. The 41-year-old, who works in online product management, took out a HELOC in February for $200,000, aiming to use the cash to buy properties he can rent out.
But with a 9% interest rate, he’s struggling to find an investment that yields enough to make it worthwhile. He’s still on the hunt, hoping prices in his area drop. If nothing else, he likes having access to extra cash if he needs it.
“It’s just having a line of credit that’s available in an emergency,” he said. “When you need credit, it’s not the time to be looking for it.”
The search for an investment property has also been hard for Gavin Galazka, a 27-year-old law enforcement officer in Naples, Florida. In May 2022, he decided to take out a $50,000 line of credit on his condo, which had jumped in value since he bought it the prior year.
But as the Fed increased rates, Galazka’s HELOC got more expensive, with the interest rate more than doubling to 8%. That made the prospect of getting a mortgage for a new property less appealing. Instead, he decided to play the stock market.
Galazka primarily trades options, such as puts on the S&P 500 for 30 or 60 days out. He said those trades usually make him enough money to pay the interest on his HELOC, which is about $280 a month. And he’s still looking for a property to buy.
“You could say, ‘Why don’t you just close the HELOC?’ ” he said. “But I like to be liquid in case something comes up on a property with an awesome deal.”