Housing market malaise hasn’t cut options for equity rich homeowners

American homeowners have never enjoyed more home equity.

The average homeowner now has $299,000 in equity, $193,000 of which is tappable while still maintaining a 20% equity stake.

Mortgage holders gained $1.6 trillion of equity in 2023, reaching a combined $16 trillion in the U.S., the highest year-end total on record, according to Intercontinental Exchange’s February Mortgage Monitor Report.

In my recent experiences, homeowners wanting to pull some cash out typically don’t want to touch their first mortgage, many of which carry a 3% lending rate or lower. So, the conversation leads to fixed-rate seconds or home equity lines of credit, commonly known as HELOCs.

Some homeowners want to use equity to build accessory dwelling units or ADUs. Others want to do home improvement or pull money out to buy another property. Others want to consolidate debt.

Fixed seconds and HELOC rates are expensive. Interest rates range widely, from perhaps 9% to 12%. Exact pricing is based on borrower specifics.

But credit card borrowing rates have exploded. The average credit card interest rate is 27.89%, according to Forbes Advisors’ report on March 28.

Household debt reached $17.5 trillion in the last quarter of 2023, according to the Federal Reserve Bank of New York.

The U.S. has more consumer debt at $17.5 trillion than mortgaged homeowners at $16 trillion. Can you say overextended?

So, yes, you can tap home equity from your primary residence, a second home, and yes, even an investment property.

Some lenders are getting aggressive. For example, one investor offers well-qualified borrowers’ cash-out HELOCs up to 95% of the property value.

Another program I found will go all the way down to a 640 FICO score. And yet another qualifies self-employed borrowers based on bank statement deposits.

You can qualify the traditional way via pay stubs, W-2s and the like. In at least one case, you can qualify based on the minimum interest-only payment. Typically, income qualifying is based on principal and interest payment. An interest-only qualifying payment is aggressive.

For those 55 and over, a reverse mortgage second loan is available, too.

Home equity lines-of-credit or HELOCs are typically liens in second position behind your very low rate first mortgage. You can borrow and pay back based on a minimum interest-only payment for, say, the first 10 years. Then you might have 20 additional years to pay the loan off via amortizing payments.

Yet, home equity lending fell in the fourth quarter of 2023, declining to 240,564 transactions or 25.6%, compared to 323,369 one year earlier, according to ATTOM Data Solutions in Irvine.

Why the low HELOC volume?

“The average HELOC rate across the U.S. spiked in the fall of 2023, reaching around 10% in November,” said Rob Barber, CEO at ATTOM. “This increase prompted many homeowners to reconsider, or even pushed some out of contention altogether.

“One factor that likely played a diminished role was refinancing as a cheaper alternative to HELOCs,” Barber continued. “A few years ago, when mortgage rates hovered around 3%, it made sense for many homeowners to refinance and take cash out as part of the deal. However, with rates up, refinancing over an extended loan period is no longer such an enticing option, particularly for those currently holding mortgages at very low rates.”

I strongly suspect another reason for the low HELOC volume is the qualifying difficulty. Simply stated, lenders add up your principal and interest, taxes, insurance, association and the second lien plus any monthly credit report debt payments, divided by the borrowers monthly gross income.

Some lenders will not allow the debt-to-income ratio or DTI to exceed 43%. Others will go to 50% DTI.

If you’ve tried to qualify for a fixed-second or HELOC and were turned down, shop around. You might find less stringent rules elsewhere.

Freddie Mac rate news

The 30-year fixed rate averaged 6.79%, 8 basis points lower than last week. The 15-year fixed rate averaged 6.11%, 10 basis points lower than last week.

The Mortgage Bankers Association reported a .7% mortgage application decrease compared to one week ago.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $237 less than this week’s payment of $4,992.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.625%, a 15-year conventional at 5.5%, a 30-year conventional at 6.125%, a 15-year conventional high balance at 6.125% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year high balance conventional at 6.5% and a jumbo 30-year fixed at 6.625%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego, and Orange counties.

Eye-catcher loan program of the week: A 30-year jumbo at 7.25% with zero points.

Jeff Lazerson, president of Mortgage Grader can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.