Homeowners refuse to tap into massive equity. Is that a mistake?

Report: Home equity increases, but borrowing doesn’t

Homeowners have built up a lot of home equity in recent years.

That’s the difference between what you owe on your property and the home’s fair market value.

A strong housing market and rising home prices have contributed to higher rates of home equity. And home equity can be tapped via a home equity loan, home equity line of credit, or cash-out refi.

But new research shows that, while owners are flush with equity, they aren’t tapping it as often as they did in the past. Most are choosing to continue building wealth and not borrow against what they’ve earned.

But are homeowners missing out on an opportunity?

Pros and cons of tapping into equity

Tapping your home’s equity has its advantages and drawbacks.

Used wisely, that tapped money can fund an important expense or payoff other high-interest debt. Used poorly, it can yield a poor return on your dollar.

And, if you can’t repay your higher home debt, you may even lose your house.

But cash-out refinance rates are currently low, so it’s worth taking a look at pros and cons carefully.

Home equity is up but few are pulling from it

A new report from the National Association of Home Builders had some interesting findings. In the first quarter of 2019:

• The market value of US households continued to rise. The aggregate market value of American households is now at $26.1 trillion. Compare that to the value of home mortgages: $10.4 trillion.
• Homeowners’ equity also grew from the previous quarter.
  • The amount of available revolving credit in home equity jumped to $530 billion—up $10 billion. Yet this has not incentivized homeowners to borrow more.
  • Home equity balances dropped by $6 billion.
  • The number of home equity revolving accounts dipped to 15.3 million, down 100,000.

Homeowners are more conservative this time around

Lawrence Yun is chief economist for the National Association of Realtors. He says the NAHB report suggests that homeowners want to build wealth without diluting it away by cashing it out.

“They remember years ago when homeowners overstepped and borrowed against their equity. This left them vulnerable to a downturn when home prices crashed,” he says.

These findings indicate something else, too.

“It implies that the housing market is very healthy and can easily withstand some downturn in the market if it were to occur,” says Yun.

Suzanne Hollander, a real estate attorney and Florida International University senior instructor, agrees.

“Homeowners are now being conservative and exercising control. They want to avoid the temptation to accumulate more debt,” she says.

This marks a pendulum swing away from the financial crisis that started in 2007.

“Back then, many people used their homes as piggy banks. They took out loans against their own home to buy all sorts of things. And they assumed that real estate values will always rise,” Hollander notes.

But when the market crashed, many were shocked by the results of using their own homes as collateral for their debt.

“They learned that lenders could take their homes away from them or force them into a short sale or foreclosure,” adds Hollander. “And some who lost their homes also suffered from bad credit. This hurt their ability to borrow money for future purchases.”

“They don’t realize how low interest rates still are, which makes borrowing money very cheap. They perceive that the cost to borrow is higher. So most are hesitant to tap into their equity”

Ralph DiBugnara, president of Home Qualified, believes there’s another reason why many aren’t pursuing a home equity line of credit, home equity loan, or cash-out refinance today.

“They don’t realize how low interest rates still are, which makes borrowing money very cheap. They perceive that the cost to borrow is higher. So most are hesitant to tap into their equity,” says DiBugnara.

Why building equity is important

Yun says building equity should be a homeownership goal.

“People want the flexibility of spending wealth at a later time. Many want to pass some portion of it on to their children. And earning more equity lessens the anxieties of financial insecurity,” says Yun.

Remember that, as you pay down your loan, the value of your property—and thus your equity—increases over time.

“That’s not true of some other types of assets,” Hollander notes. “To many people, their home is their largest financial investment. If the value increases over time, they may be able to sell it and make a significant profit.”

Now, more than 10 years after the financial crisis, building equity is a goal shared by many owners.

“They’re very conscious about building equity just in case something happens,” says DiBugnara.

When tapping equity is worth considering

But that’s not to say that you should never consider tapping your home’s equity or opening a home equity line of credit.

“If your equity is tied up in your home, the money is not working to make you more money,” DiBugnara explains. “With ample equity, owners can borrow at a low cost against it. And they can use that equity to invest in other places and grow their wealth.”

Worthy investments that can grow your wealth could include the stock market or retirement funds tied to the stock market. It can also include home improvements that offer a good return on investment (money that can be recouped when it’s time to sell).

“If equity is tapped to improve your overall financial standing over the long haul, then it is well used”

“If equity is tapped to improve your overall financial standing over the long haul, then it is well used,” says Yun. “Examples include paying for college tuition, home remodeling, and paying off credit card debts. Sometimes it’s necessary to tap equity to pay bills for unexpected medical conditions or business expansion, as well.”

Bad reasons for tapping equity include “conspicuous spending, like buying a fancy car or going on an indulgent vacation,” Yun adds.

Hollander believes you should only borrow against your equity if you’ve done your homework.

“Understand the risks involved with a home equity loan or home equity line of credit. Be aware of the interest rate, duration of the loan, and ability to repay if your property’s value doesn’t increase.”

Get a quote for a cash-out refinance or home equity loan

Home equity is up, and that means you can likely fund other major financial goals like a college education or home improvements.

Qualifying for equity-tapping loans has gotten easier in recent years, and it’s a great time to get a quote.