Is The Tide About To Turn For Home Equity Loans?

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With mortgage rates still hovering near 7%, the pace of homebuying has fallen over the past year. However, with prices continuing to rise and a record median price of $426,900 hit recently, those who bought a home, especially when mortgage rates were below 5%, enjoy a high amount of equity in their homes. For the first quarter, CoreLogic analysis showed U.S. homeowners with mortgages saw their equity increase by a whopping $1.5 trillion, up 9.6% year over year.

So far in this current economic cycle, homeowners haven’t been tapping into that equity. Sales are down, and high interest rates have heavily impacted refinancing. Refinances are starting to creep up from last year’s lows. The Mortgage Bankers Association Refinance Index is 37% higher than a year ago.

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Another way to access equity without selling a home is to use a home equity line of credit (HELOC) or a home equity loan. According to the Mortgage Bankers Association (MBA), the originations of HELOCs and home equity loans are below where they were just a few years ago, up 1.5% from 2022 to 2023 from $2.10 billion per company to $2.13 billion.

“Even with evidence of easing credit availability, with originations activity moving to lower FICO credit scores, higher combined loan-to-value ratios, the closings to applications pull-through rate dropped, indicating that home equity lenders were doing more work for fewer loans,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. Walsh pointed out that although loan originations were slow, there was an 8.3% increase in home equity debt outstanding.

What Could Change The Picture?

There are several reasons that homeowners decide to access their equity. One is a big home remodel. The MBA data showed a current trend away from home renovation. Borrowers using these loans for home renovations were down from 65% of the volume in 2022 to 56% in 2023. That cycle could be shifting. The Leading Indicator of Remodeling Activity put out by the Joint Center for Housing Studies of Harvard University is forecasting that the downturn in the pace of remodeling in owner-occupied homes will slow to -0.5% through the second quarter of 2025. Remodeling activity peaked in the third quarter of 2022. If we see more home inventory rise and buyers decide to sell, that could also impact the pace of remodeling and the need for more home loans.

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Another trend to keep an eye on is the use of loans for debt consolidation. This usage rose from 25% in 2022 to 33% in 2023. This could indicate that the consumer is experiencing more financial pressure. The Bureau of Economic Analysis recently released the second quarter GDP numbers, which showed that personal savings as a percentage of disposable personal income dropped from 3.8% in the first quarter to 3.5% in the second quarter.

The biggest impact on both refinancing and home equity loan origination will likely be a change in the cost of borrowing. The world is anxiously waiting for the announcement of a cut in the federal funds rate. If that happens, we should see both mortgage and refinancing rates drop. This could prompt some homeowners to unlock some of the equity in their homes.

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This article Is The Tide About To Turn For Home Equity Loans? originally appeared on Benzinga.com

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