“Navigating High Mortgage Rates: Home Equity Loans and HELOCs as Viable Options”

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Mortgage Refinancing: A Distant Dream?

Homeowners may not see mortgage refinancing as a viable option anytime soon. In the 2010s, cash-out refinancing was a popular method to tap into home equity. With average rates for 30-year fixed mortgages declining steadily, homeowners could refinance multiple times. By 2018, cash-out refinances outnumbered traditional rate-and-term refinances, according to Freddie Mac.

Current Mortgage Rates

As of mid-2023, mortgage rates average around 6.75%, making refinancing for a larger mortgage impractical for most homeowners. Many borrowers are paying much lower rates than the current national average, so refinancing today wouldn’t be beneficial, even if it resulted in extra cash.

When to Consider Refinancing

In the past, refinancing made sense when the new loan’s rate was at least 1 percentage point lower than the current mortgage rate. Homeowners also had to consider closing costs and the possibility of resetting the clock on another 30-year mortgage.

Experts are uncertain about the future of mortgage rates, but many believe rates will remain between 6% and 7% for the foreseeable future.

Majority of Mortgage Debt Has Sub-3% Interest Rate

Current rates are not low enough for refinancing to benefit most homeowners, as more than half of mortgage holders have a rate of 4% or lower, according to Freddie Mac. A cash-out refinance may not be an option for these homeowners for years, if ever.

Enter Home Equity

While cash-out refinances are not advantageous, homeowners can still benefit from home equity loans or home equity lines of credit (HELOCs). Even with higher interest rates, these options can result in less overall interest paid. This is particularly beneficial for homeowners with significant equity on a low-rate mortgage, according to a study by the Center for Responsible Lending and American Enterprise Institute.

U.S. homeowners have close to $16 trillion in home equity, with more than $10 trillion considered tappable, according to Black Knight. Tappable equity is the percentage of a home’s value that can be borrowed against, alongside an existing mortgage.

Waiting for the Dough

Despite the abundance of tappable income, home equity loans and HELOCs remain largely dormant. Homeowners may hesitate because a home serves as collateral, and inability to repay could result in foreclosure.

Banks and lenders are also cautious about making home equity or HELOC loans. Unlike primary mortgages, which can be sold to Freddie Mac and Fannie Mae, HELOCs remain on the banks’ books. Foreclosing on a home requires managing the property until resale, a task lenders are wary of after the housing crash in the late 2000s.

However, Experian data shows that HELOCs are slowly gaining popularity after years of decline.

Number of HELOCs Outstanding

There are good reasons for homeowners to use their equity to manage household finances, such as competitive rates versus personal loans. Home equity loans are tax-advantaged if used to improve the home. Debt consolidation is also a popular use of HELOC funds due to the lower APR compared to most variable-rate credit cards.

A homeowner’s credit score and debt-to-income ratio can influence a lender’s decision to extend a HELOC or home equity loan. Typically, lenders are less stringent about credit scores if the homeowner has significant equity.

Getting your near-term finances in order can benefit a HELOC application. Refrain from increasing your debt-to-income ratio, keep current loan payments on track, and ensure you have as much equity as estimated, as home prices have declined in some U.S. regions in 2023.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you navigate your mortgage options and find the best solution for your financial situation.

Methodology: The analysis results provided are based on an Experian-created statistically relevant aggregate sampling of our consumer credit database that may include use of the FICO® Score 8 version. Different sampling parameters may generate different findings compared with other similar analysis. Analyzed credit data did not contain personal identification information. Metro areas group counties and cities into specific geographic areas for population censuses and compilations of related statistical data. FICO® is a registered trademark of Fair Isaac Corporation in the U.S. and other countries.

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