After helping his grandson pay his aircraft mechanic school tuition, Jim Hall was struggling to cover all of his own expenses. But instead of adding another small loan to his growing debt, the homeowner decided to try something different: He borrowed from the value of his house.
Now, instead of managing multiple loans, including high-interest credit card debt, the 67-year-old retiree is paying off one loan with a fixed interest rate at about 7% and a set monthly payment.
“I'd kind of been struggling through to just be able to pay his expenses and my expenses being retired on a fixed income,” Hall said in an interview. “So even though the interest rates were kind of high, I thought, well, let me just see what I could do and maybe consolidate some of these things to make sure that I keep everything covered for a little while longer.”
It’s a personal finance strategy that more mortgage holders are turning to at a time when home prices are soaring. Though second mortgages and home equity lines of credit have existed for decades, homeowners are taking greater advantage of these sources of cash given their record-high home equity as a result of more expensive houses.
The approach provides another reason for owners of houses and condominiums to stay in their property, rather than sell and rent an apartment or smaller place to pull cash out. As of the first half of this year, homeowner equity was at a new high, according to St. Louis Federal Reserve data. And based on last year’s borrowing patterns, lenders anticipate that home equity borrowing will expand at least through 2025, according to a Mortgage Bankers Association study.
But industry professionals warn that borrowers will have to find a balance between waiting for an attainable interest rate without waiting until home price growth slows and they need to be disciplined to keep paying down debt to avoid increasing interest costs.
Since the beginning of 2020, the median price of a single-family house in the United States has increased more than 25%, rising from $329,000 to more than $412,000. And in the year ended in July, prices grew 5%, the latest S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index shows.
That rapid increase has pushed equity, the difference between a property's current value and its unpaid mortgage, to new highs. Compared to the same time a year earlier, home equity increased 8% in the second quarter, according to the latest data released by analytics firm CoreLogic. That means the average U.S. homeowner with a mortgage gained about $25,000 in equity over those 12 months. In total, existing equity is about $315,000 for homeowners, up almost $130,000 from before the COVID-19 pandemic, according to the data.