Rising Mortgage Rates and Slumping Home Sales Increase Use of HELOC and Home Equity

HELOC and Home Equity Loans

Long-term mortgage rates are climbing while home sales are falling. As a result, more homeowners are turning to home equity loans and home equity lines of credit (HELOC) to free up cash.

Mortgage Rates Rising

Yesterday, Freddie Mac announced that rates for a 30-year mortgage rose from 6.32 percent to 6.5 percent – the highest it has been since November. At that time the long-term mortgage rates topped out at 7.08 percent.

Rates are likely to go up again after the Federal Reserve Bank’s (FED) next meeting in late March due to rising inflation. The Fed’s favorite inflation gauge, the personal consumption price index (PCPI), is running higher than expected. The Commerce Department reports that inflation is .6 percent. That is about .1 percent higher than anticipated.

The Fed has tried to tap down inflation by raising rates. Since March last year, the central bank has hiked rates by 4.5 percent.

Home Sales Dropping

Home sales have declined each of the last 12 months, according to the National Association of Realtors (NAR). The drop this month was .7 percent. Year-over-year sales have fallen 36.9 percent.

A new estimate issued today by the U. S. Census Bureau and the Department of Housing and Urban Development (HUD) reports that home sales were actually up in January from December. However, that estimate of 670,000 home sales is well below the 831,000 sales last January.

“Home sales are bottoming out,” said NAR Chief Economist Lawrence Yun. “Prices vary depending on a market’s affordability, with lower-priced regions witnessing modest growth and more expensive regions experiencing declines.”

With sales plummeting, you might expect prices to be falling as well. However, NAR data reveals that home prices increased in January for the 131st consecutive month. The median price for a home last month was $359,000. That was an increase of 1.3 percent from January 2022.

Creative Use of Equity

With mortgage rates rising and sales falling, homeowners looking for financial gain find themselves in new territory. That has given rise to increased use of home equity loans and HELOC.

Today, the average rate of a HELOC is 7.8 percent, according to Bankrate. However, rates can be found as low as 6.45 percent for those with excellent credit. The rates for equity loans are about the same.

Typically home equity and HELOC loan rates are higher than mortgage rates. That is because mortgages have to be paid before equity loans or lines of credit. However, with the housing market stalled, more homeowners are looking for other ways to tap the financial resources of their homes.

In the first half of last year, HELOC loans totaled $131 billion on 807,000 applications, according to CoreLogic. That is a 30 percent increase year-over-year.

HELOC Versus Home Equity Loans

Home equity loans allow you to borrow a lump sum. You then repay the loan at a fixed rate over a specified period – usually 30 years. Such loans are often used to make home repairs and improvements, or consolidate debts. However, if you want to blow the money at a casino, you can.

A HELOC is a revolving line of credit similar to a credit card. When you get the loan, you do not get a lump sum. Instead, you are granted access to cash up to the amount of the loan. If you take money out of the account, you must repay it.

Unlike a home equity loan, HELOC carry a variable rate. Usually, these loans are only available for a specific “draw period” of 10 years. During that time, you can borrow and repay over and over again. During the draw period, you only have to pay interest. However, when the draw period ends you must repay any balance and interest. Typically, you have up to 20 years to do that.

Considerations

Tapping home equity carries risks and rewards. The reward is that you access funds to meet financial needs. The risk is that you could lose your house. Therefore, you should make sure you understand the terms of any such transaction.

For more information, a good resource is the Consumer Finance Protection Bureau’s booklet on HELOs.

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Max Erkiletian

Max K. Erkiletian began writing for newspapers while still in high school. He went on to become an award-winning journalist and co-founder of the print magazine Free Bird. He has written for a wide range of regional and national publications as well as many on-line publications. That has afforded him the opportunity to interview a variety of prominent figures from former Chairman of the Federal Reserve Bank Paul Volker to Blues musicians Muddy Waters and B. B. King. Max lives in Springfield, MO with his wife Karen and their cat – Pudge. He spends as much time as possible with his kids, grandchildren, and great-grandchildren.