Millions of homeowners who purchased their property before home values spiked and interest rates rose are sitting on a hefty amount of home equity that can be tapped to pay down high-interest debt or other expenses.
Home equity is the difference between what you owe on your house and what it is currently worth, explained BOK Financial® Home Loans Product Manager Kurt Morris. "We're seeing a trend across the industry of people using their home equity to consolidate debt."
According to August's Mortgage Monitor Report by Black Knight Inc., the average borrower has $199,000 in available equity, down slightly from recent highs, but still solid. Total mortgage equity topped $16T with $10.5T of that being "tappable" meaning it's available for the homeowner to borrow against while still maintaining a 20% equity stake.
The latest Homeowner Equity Report from CoreLogic shows home equity changes in the past year across BOK Financial and its subsidiary markets. Some western states saw huge increases in home valuations over the past few years only to have them ease recently as the housing market in some areas cooled.
Changes in average home equity per home from Q1 2022 to Q1 2023
| State | Change |
Arkansas |
+$11,000 |
|
New Mexico |
+$10,000 |
|
Missouri |
+$8,000 |
|
Kansas |
+$7,000 |
|
Oklahoma |
+$7,000 |
|
Arizona |
-$19,000 |
|
Colorado |
-$23,000 |
|
Texas |
Unchanged |
"The Federal Reserve has raised interest rates 11 times in the past 17 months in an attempt to cool the economy and curb inflation. As a result, homeowners are reluctant to refinance their current low-interest rate mortgage, and instead are turning to a home equity loan or a home equity line of credit," said Morris.
Equity options
There are several home equity options.
- Home equity line of credit. HELOCs give you access to a line of credit you can tap into as needed for a set duration of time called a draw period. HELOC interest rates are variable, meaning you may see increases or decreases over time and the line of credit will show up on your credit report.
- Home equity loan. HELOANs gives you all the proceeds, after closing, in one lump sum. It is sometimes referred to as a second mortgage. You then repay the loan over time with a predictable fixed rate.
- Cash-out refinance. This option replaces your mortgage with a new one. You use the loan to repay the original mortgage, and the remaining cash is yours to do with as you please.
"Before you embark on the journey of tapping into your home equity, speak with your lender about your budget and goals so you can find the best option for you," suggested Morris.
Home equity uses
Using your home equity to pay off high-interest debt could end up saving you money because of the difference in interest rates. Take, for example, credit card balances, which for the first time, have crossed the $1 trillion mark nationally. The average credit card rate is above 20%, while the average home equity loans rates are between 7% and 10%.
"HELOANs have overtaken HELOCs in terms of popularity recently and that is mostly attributed to the demand of consolidating credit card or other debt," said Morris.
The savings can add up quickly—and you'll pay off your debt faster at a lower rate. If you owe $10,000 and are paying $200 each month at a 20% interest rate, you will end up paying $11,680 in interest over 9.1 years compared to $2,990 in interest over 5.4 years if the rate was 10%.
Credit card versus home equity loan
Making $200 monthly payment
Credit card with 20% interest rate |
HELOAN with 10% interest rate |
|
Amount of interest paid |
$11,680 |
$2,990 |
Time period to pay off $10,000 balance |
9.1 years |
5.4 years |
Other common uses for home equity
Borrowing against your home's equity to improve your home may be worth it, especially if you love your location and don't want to get stuck with the current higher interest rates.
If you graduated with student loans or are returning to school, you can use your home equity to cover a portion or all of the cost of education for yourself or a family member or to consolidate student loans.
Your home equity can be used to cover just about anything. Morris has seen customers use it for weddings, healthcare costs and divorce settlements.
"If you need to finance a large purchase, it's best to find the lowest interest rate possible. In this economic environment that might mean using your home equity," explained Morris. "As long as it's legal, there's no right or wrong way to use the equity in your home to your advantage."
. © 2024 BOKF, NA.