Americans have more than $32 trillion in home equity — a record high. Here’s what to know before you tap it

Thanks to the run up in housing prices, homeowners now have more than $32 trillion in home equity as of the first quarter of 2024, according to the St. Louis Federal Reserve — an all-time high.

“It’s one of the very few things we can say about today’s housing market that is, more or less, positive,” said Jacob Channel, senior economic analyst at LendingTree.

While the average borrower sits on roughly $214,000 in equity that can be tapped, 60% of homeowners have at least $100,000, the Intercontinental Exchange’s Mortgage Monitor also found. Tappable equity is the amount most lenders will allow you to take out while still leaving 20% in the home as a cushion.

Rising home prices have “continued to build the fortunes of existing homeowners, pushing tappable equity to its highest level ever,” said Andy Walden, vice president of research and analysis at the Intercontinental Exchange.

Although homeowners are sitting on a record amount of housing wealth, the cost of borrowing against your home is also near the highest it’s been in recent years largely due to a series of rate hikes by the Federal Reserve, according to Greg McBride, chief financial analyst at Bankrate.com.

High interest rates makes access to home equity more challenging.

“There’s a long-held sense that it’s a cheap source of funds, but that paradigm has changed,” McBride said.

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In the aftermath of the pandemic, many existing homeowners refinanced their mortgage when interest rates hit rock bottom and pocketed the difference as a lump sum.

Currently, with mortgage rates around 6.3%, fewer homeowners are jumping at the chance to do a cash-out refinance.

“As rates come down, you might see more opportunities for a cash-out refi, but nobody is going to confuse it with 2021,” McBride said, referring to the period of “ultra-low” rates after the Fed slashed its benchmark to near zero.

And yet, some homeowners are already more willing refinance now that mortgage rates are down from recent highs — as of the latest reading, mortgage refinance demand is more than 100% higher than a year ago.

Alternatively, a home equity loan is a type of second mortgage, which allows borrowers to pull cash while using the house as collateral. In this case, the loan comes as a lump sum with a fixed rate.

“A home equity loan could be a good option for homeowners who want to raise money to pay for renovations, either to make the home more to their liking, or to fix it up before selling the home next year,” said Holden Lewis, home and mortgage expert at NerdWallet.

However, the current average home equity loan interest rate is 8.52%, according to Bankrate, notably higher than a 30-year fixed-rate mortgage.

In this case, as well, “elevated rates have contributed to homeowners’ reluctance to take out fixed-rate home equity loans,” Lewis said, “but some of that trepidation will melt as rates drop.”

Otherwise, a home equity line of credit, also known as a HELOC, lets you borrow money against a portion of your home’s equity. Instead of taking out a home loan at a fixed amount, a HELOC is a revolving line of credit — but with better rates than a credit card — that you can use when you want to or just have on hand.

The average HELOC interest rate is just shy of 10%, according to Bankrate. While those rates are high compared with the typical mortgage or home loan, they are significantly lower than what it costs to borrow on credit cards, which charge more than 20%, on average.

Of course, different lenders will also offer different terms and interest rates, according to LendingTree’s Channel.

Channel recommends talking to several mortgage companies or loan officers, as well as weighing all of the costs before deciding what course of action makes the most sense.

When it comes to borrowing against your home, the rate and terms of a loan are not the only considerations, he added. There are also risks associated with tapping your home for cash.

“Defaulting on a home equity loan can have serious negative consequences,” Channel said.

Chief among them is that failure to pay back a home equity loan can result in foreclosure, he said. Even if it doesn’t, it can still ruin your credit and otherwise make it much harder for you to get approved for another loan — regardless of the type.

“The best piece of advice is to be thorough and to plan ahead,” Channel said. “Make sure you are in position that whatever you borrow, you will be able to pay back. This isn’t one of those things you should try to wing.”

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