Americans have seen as much as a 64% increase in average levels of home equity since 2018, rising to $29.3 trillion.
But interest rates and tighter lending standards for more traditional home equity tapping options — including Home Equity Lines of Credit (HELOCs) or cash-out refinances — have limited the options for consumers to tap that equity, according to a study conducted by alternative equity vendor Point.
These traditional products have become “less accessible and attractive” due to the rate environment and tighter lending standards, the results read. This means that while home equity levels have increased by 241% over the past decade, outstanding loan balances for home equity loans and HELOCs have declined by 48% over the same period.
“Americans are feeling financial stress in various ways right now: credit card debt is at all-time highs, savings rates have dipped, and inflation has dramatically increased the cost of living,” said Eddie Lim, co-founder and CEO of Point. “However, homeowners are sitting on significant wealth they could use to improve their situations but don’t have a great option to access the wealth. It’s like we’ve all lost the PIN to our debit card – we have the money but don’t know how to access it.”
With mortgage rates reaching highs not seen in years, cash-out refinances are proving to be more expensive than they’ve been in over 20 years, the findings stated.
“The denial rate for HELOCs is 46%, compared to 12% for a conventional mortgage,” the results said, based on data from the Home Mortgage Disclosure Act (HMDA). “Credit scores can factor in HELOC denials: lenders generally require a credit score of at least 680 (although many prefer a score above 720), while 25% of Americans have a credit score under 650,” according to data from FICO.
The final report only briefly mentions reverse mortgage options.
“Reverse mortgages are an option for homeowners who meet the Federal Housing Administration (FHA) standards set out in the Home Equity Conversion Mortgage (HECM) program,” the report explained. “HECMs allow access to equity via a line of credit or a lump sum, but it’s important to understand that they aren’t for everyone: they have an age minimum of 62, homeowners must pay off their mortgage fully, and the loan is not assumable by heirs.”
The verbiage could be confusing for certain consumers. While an existing mortgage does need to be satisfied, that can come from a HECM’s loan proceeds as opposed to requiring satisfaction of the original mortgage before obtaining a reverse mortgage. Still, a borrower will need sufficient equity and a low enough forward mortgage balance for this to be feasible.