MW HELOC demand from homeowners surging as Fed cuts interest rates
By Aarthi Swaminathan
'Demand has been through the roof' with HELOCs, one lender says
Mortgage lenders are reporting an uptick in interest from homeowners looking for ways to extract equity from their houses through home-equity lines of credit as mortgage rates are poised to fall.
With the Federal Reserve cutting its benchmark interest rate for the first time in four years by 50 basis points on Wednesday, rates on HELOCs are expected to fall in the near term, offering an opportunity for homeowners who have built up equity in their houses to cash in.
A HELOC is a type of revolving credit that allows a homeowner to borrow against the equity in their home. Borrowers can spend up to their credit limit during the draw period, which can be up to 10 years, after which they enter a repayment period, according to the Consumer Financial Protection Bureau. Rates on HELOCs are variable and are tied to Federal Reserve monetary policy.
The average rate for a HELOC was 9.25% according to comparison-shopping website Bankrate, as of Sept. 11.
HELOC rates are typically tied to the prime rate, which is what banks use as a basis to set rates on different types of loans, such as credit cards. HELOC rates are also typically a few points higher than the rate on a 30-year mortgage.
Over the course of the last week, "there has been a slight dip in home-equity loan rates," Bill Banfield, chief business officer at Rocket Companies $(RKT.UK)$, told MarketWatch. Rocket is one of the biggest mortgage lenders in the U.S., and with the Fed cutting rates, Banfield is expecting HELOC rates to fall further.
Read more: Homeowners are flocking to HELOCs. Watch out for these pitfalls.
Many homeowners are looking to take on a HELOC or other home-equity loan products because they want to avoid refinancing their primary mortgage that has an ultralow rate, lenders said. About nine in 10 homeowners have an existing mortgage with a rate below 6%, and notably, 22% have a rate below 3%, according to analysis of federal data by Realtor.com. (Realtor.com is operated by News Corp subsidiary Move Inc.; MarketWatch is a unit of Dow Jones, which is also a subsidiary of News Corp.)
HELOC demand surged in 2023, according to a report by the Federal Reserve Bank of New York, as homeowners cashed in on record levels of housing wealth. In the second quarter of this year, U.S. homeowners with mortgages saw their home equity increase by 8% from a year ago, with an average increase of $25,000 per borrower since last year, according to a report by real-estate data-analytics company CoreLogic.
At United Wholesale Mortgage, another big mortgage lender, business has been brisk. Homeowners are "looking to take advantage of equity in their house by doing a HELOC," Alex Elezaj, chief strategy officer at UWM $(UWMC)$, told MarketWatch, particularly with an eye toward avoiding any disruption to a lower-rate first mortgage.
"HELOC demand has gone through the roof this year," Vishal Garg, chief exectutive of digital mortgage lender Better.com $(BETR)$, told MarketWatch.
Particularly for homeowners who aren't planning to sell their homes, a "HELOC product is the cheapest way to improve or renovate their home," Garg added, "and so we've seen HELOC demand more than double this year."
Older homeowners were most likely to tap into their home equity for cash. Between 2023 and the second quarter of 2024, roughly 1.8 million HELOCs were originated, the New York Fed found, with 57% of them by borrowers aged 50 and older.
Half of homeowners who cashed in on their home equity took on lines of credit of less than $100,000. About 28% of the 1.8 million HELOCs had limits below $50,000, and 29% had limits in the $50,000 to $100,0000 range.
In 2023, the average HELOC balance rose by 2.7% from the previous year, according to Experian (UK:EXPN) (EXPGY) data, to $42,139. While HELOC limits range from $75,000 to $175,000, homeowners usually borrow roughly one-third of their limit, the company noted, which mirrors the cost of major home renovations.
In fact, about half have a HELOC but with a $0 balance taken out, just in case of emergency funds or for future financing needs, Experian added.
-Aarthi Swaminathan
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September 18, 2024 14:17 ET (18:17 GMT)
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