Tapping home equity is expected to become more popular as homeowners continue regaining equity lost in the recession and interest rates start to rise, according to CoreLogic’s latest The MarketPulse.
“As house prices recover and interest rates rise, existing homeowners are gaining back equity in their homes that they can borrow against, and so are incented to get home equity loans rather than to move or refinance,” says an April 15 MarketPulse article.
Nearly half of all current outstanding mortgages have interest rates below 4.5%, according to CoreLogic, producing “significant disincentive” for a homeowner to move refinance in the future when rates are higher.
There are three typical avenues homeowners can take if they want to increase the utility they receive from their houses: sell the existing home and buy a bigger one; refinance their mortgage and get a “cash out” to do home improvements; or get a home equity loan or line of credit to pay for home improvements, the article says.
When interest rates are on the rise, the first two options are more expensive as borrowing costs increase.
That makes keeping the original loan balance at a historically low mortgage interest rate and borrowing against home equity a more cost effective way to pay for home improvements, CoreLogic says.
“As borrowers regain their equity and interest rates continue to increase over the next few years, the incentive to stay in one’s existing home and finance home improvements will increase relative to purchasing a new home or refinancing with a cash out,” predicts CoreLogic. “This is good news for… mortgage lenders who focus on home equity lending as [they] will benefit from the resurgent consumer demand.”
Access CoreLogic’s The MarketPulse.