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The Return of the Home Equity Loan
Home equity loans are experiencing a resurgence in this era of higher interest rates, according to Experian data. After years of being overshadowed by cash-out refinancing, homeowners are once again considering home equity loans to tap into their home equity. This trend, although modest, marks a shift from the refinancing frenzy of 2021 when many homeowners secured mortgages at enviably low rates.
Home Equity Loan Usage
Home equity loans are often used for significant home renovation projects, debt consolidation, and other financial needs. These loans offer more favorable terms compared to other types of credit, though they come with the caveat of a second lien on the property. Monthly home equity loan originations increased from 137,000 in June 2023 to 143,100 in June 2024, a 4.5% rise.
Average Loan Amounts
Interestingly, the average amount borrowed has remained steady despite higher interest rates and inflation. By June 2024, the average home equity loan amount was $46,700, slightly down from $48,800 in June 2023. The loan amounts vary significantly by state, often reflecting property values. High-cost states like Hawaii have larger average loans, while Northern plains states also show substantial loan sizes, possibly due to rural housing needs.
How Home Equity Loans Differ From Other Types of Credit
Home equity loans differ from other credit types as they are based on the equity homeowners already possess. While market conditions and the amount of equity play significant roles, credit scores also impact the loan rates. For instance, a borrower with a FICO score of 760 or higher may receive a mortgage with an APR about 1 percentage point lower than someone with a 680 FICO score, potentially saving hundreds of dollars monthly.
Unlike HELOCs, which function like credit cards, home equity loans are fixed-term loans with fixed rates, ensuring stable borrowing costs throughout the loan period.
Home Equity Loans vs. Cash-Out Refinances
Despite the rise in home equity loan volume, it remains small compared to the cash-out refinance boom of the 2010s. In 2023, home equity loan originations totaled $79 billion, far less than the $450 billion in cash-out refinance proceeds at their peak in 2020. This is despite the significant increase in tappable home equity, which now totals over $30 trillion, with $11.5 trillion being tappable.
Future Prospects for Home Equity Loans
The Federal Reserve’s anticipated rate cuts could make home equity loans even more attractive. Additionally, a proposal to streamline the application process for home equity loans could further boost their appeal. A pilot program by Freddie Mac aims to make these loans eligible for purchase, potentially reducing the burden on banks and making home equity loans more accessible to homeowners.
Contact O1ne Mortgage for Your Home Equity Loan Needs
At O1ne Mortgage, we are committed to helping you navigate the complexities of home equity loans. Whether you’re looking to renovate your home, consolidate debt, or explore other financial opportunities, our team is here to assist you. Call us today at 213-732-3074 to discuss your mortgage needs and discover how we can help you achieve your financial goals.
