Homeowners tap equity as HELOC balances post biggest jump since 2005: New York Fed report

Homeowners tapped their home equity lines of credit in the third quarter at the highest rate in more than two decades, according to a new Federal Reserve Bank of New York report on household debt released Tuesday.

Balances on HELOCs jumped by $23 billion during the three months ending Sept. 30, the largest increase since 2005. That brings the outstanding amount owed to $481 billion, the report shows. This also marks the 18th consecutive quarterly increase.

HELOC balances peaked at roughly $714 billion in the first quarter of 2009, according to a 2015 New York Fed report.

The current rise in balances comes amid a sluggish housing market, due at least partly to the so-called mortgage rate lock-in effect. Just under half of outstanding mortgages — 49.1% — carried rates of 4% or lower in the second quarter, according to a Realtor.com analysis of federal mortgage data, leaving many owners reluctant to give up their low rates to purchase another home at current higher borrowing costs.

The median price of an existing home was $417,500 in September, according to the National Association of Realtors, a real estate trade group. While up just 1.3% from a year earlier, the amount is nearly 54% higher than in September 2019, according to NAR. The average rate on a typical 30-year fixed-rate mortgage is 7.3% as of Tuesday, according to Mortgage News Daily.

"HELOCs let them borrow against their equity without giving up the low interest rate on their home," said certified financial planner Douglas Boneparth, president and founder of Bone Fide Wealth in New York City and a member of CNBC's Financial Advisor Council.

Mortgage holders have $17.5 trillion in equity

Mortgage holders collectively had $17.5 trillion in home equity as of the third quarter, according to a new report from Intercontinental Exchange, or ICE, a financial markets technology and data company.

Tappable equity that can be accessed — meaning a homeowner's equity would remain at or above 20% of the home's value after tapping it — rose 1.2%, or $16,600, from a year ago to an average of $204,000 per borrower, the ICE report shows.

"Homeowners are sitting on substantial housing wealth, with 2.4 million mortgage holders now holding at least $1 million in equity," Andy Walden, head of mortgage and Housing Market Research at ICE, said in the report.

Average HELOC rate is 7.49%

HELOCs let you tap a line of credit over time as you need the money, instead of getting it all at once like a home equity loan or cash-out refinance.

While HELOCs may have fewer up-front costs than a home equity loan, they generally have a variable interest rate. This means it will move up and down based on a benchmark like the prime rate, which banks use as a basis to set rates on a variety of loans. And, while the Federal Reserve doesn't control that rate, it is influenced by changes the Fed makes to the so-called federal funds rate.

"If your budget only works at today's rate, then your budget doesn't really work," Boneparth said of HELOCs. "You kind of have to be mindful of the fact that rates may go up."

If your budget only works at today's rate, then your budget doesn't really work.

Douglas Boneparth

President and founder of Bone Fide Wealth

The average interest rate for a $30,000 HELOC was 7.49% as of Nov. 4, according to Bankrate.

Many HELOCs also have a "draw" period when you can take money out, which often lasts five or 10 years. During that time, you typically are only required to pay the interest on any funds you've withdrawn. After that, however, you'll enter a repayment period of, say, 10 or 20 years, when you're required to pay both interest and principal. Because of that, your payments will jump if you've only been paying interest.

"The real test comes when the repayment period kicks in, and the principal starts to show up, if that's how their HELOC is structured," Boneparth said. "Payments potentially could double overnight, and you really want to know that before you sign anything."

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Additionally, consider what you're planning to use the money for, Boneparth said.

"If you're borrowing against your home to improve your home, that could make a lot of sense," Boneparth said. "Borrowing against your house to pay off credit cards is a little trickier because you're turning unsecured debt into debt secured by the roof over your head."

In that case, if your spending habits don't change, he said, "you're just moving the problem somewhere a little scarier."