Good news for homeowners these days: Thanks to housing values that are on the rise, they’re accruing record amounts of home equity.
That means more spending power for people who might not otherwise have that capacity.
During the third quarter of 2017, the “tappable” equity in U.S. homes reached a record $5.5 trillion, meaning 80 percent of U.S. homeowners now have some amount of equity available to spend if they choose. These days, only 2.7 percent of homeowners — some 1.36 million — still owe more on their mortgages than their homes are worth.
As such, Housingwire.com points to studies showing some 10 million homeowners are expected to take out home equity lines of credit (HELOCs) in the next four years — double the combined number established between 2012 and 2016.
So how are Americans taking advantage? Many are using that financial breathing room to make long-wanted renovations to their homes. CNBC reports consumer spending on such renovations (not including projects by investors) hit $152 billion last year, a number slated to hike 4.9 percent in 2018. Further, a December survey shows 80 percent of U.S borrowers with existing HELOCs would consider using part toward home revisions.
"We're not only seeing more requests for proposals, but more committed projects from home owners," Virginia-based remodeler Steve Cunningham recently told the National Association of Home Builders. "In addition to regular updates and repairs, there's been an uptick in more ambitious large remodel requests."
Analysts attribute part of that trend to the nation’s preponderance of aging homes at a time when home building rates are lower than normal. Another factor is consumer confidence: Because home values are rising, they see home improvements as smart investments that will outweigh the costs of their HELOC interest.
Others are seeing the benefits of using their home equity for other purposes. For example, CNBC reports:
- Many are paying down high-interest debt unrelated to their mortgages.
- Some are using the money for investments in the stock market or cryptocurrencies such as bitcoin.
- Because rental demand is high and rental management firms can often handle much of the busy work, some entrepreneurs are using the money for real estate investment.
- Some are investing in further education for themselves or their children.
How do HELOCs work? Simply put, a HELOC is a line of credit that uses the value invested in your home as collateral. Debtors can write checks against that line at their discretion, accruing interest (at a fixed or variable rate, depending on the terms) only on the expenditures they make.
In general, analysts advise against using HELOCs to live beyond your means, to finance home additions that ultimately won’t increase its value or to make investments that could be risky. Bottom line: You could lose your house if you are ultimately unable to pay back the money you withdraw.
“A home equity line of credit is a poor tool to use to speculate, even when you're supremely confident the bet will work out,” advises Jay Jenkins on TheMotleyFool.com. "That applies to real estate, the stock market or any other hot investing fad of the moment. Yes, the interest rate may be low and the cash easy to access, but is it really worth putting your house on the line for such an uncertain outcome? Avoid these mistakes and your home equity line of credit can be a great tool in your financial toolbox.”