HELOC balances surge to highest level in two decades, New York Fed report shows

Hispanolistic | E+ | Getty Images

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 $23 billion during the three months ending Sept. 30—the largest increase since 2005. The outstanding balance now totals $481 billion, marking the 18th consecutive quarterly rise, the report shows.

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

The current uptick occurs amid a sluggish housing market, partly driven by the “mortgage rate lock‑in” effect. Approximately 49.1 % of outstanding mortgages carried rates at or below 4 % in the second quarter, per a Realtor.com analysis, making many homeowners reluctant to give up their low rates for a new purchase in a higher‑cost environment.

Mortgage holders now have $17.5 trillion in home equity

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

Tappable equity—defined as the amount a homeowner can withdraw while retaining at least 20 % equity—rose 1.2 % (or $16,600) year‑over‑year 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,” said Andy Walden, head of mortgage and housing‑market research at ICE.

Average HELOC rate reaches 7.49 %

HELOCs provide a flexible line of credit that can be drawn over time, unlike a home‑equity loan or cash‑out refinance, which disburse the full amount upfront.

These lines typically carry variable interest rates that move with benchmarks such as the prime rate. Although the Federal Reserve does not set the HELOC rate directly, it is influenced by Fed adjustments to the federal funds rate.

“If your budget only works at today’s rate, then your budget doesn’t really work,” warned certified financial planner Douglas Boneparth of Bone Fide Wealth. “You have to be mindful that rates may rise.”

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 on a $30,000 HELOC was 7.49 % as of Nov. 4, according to Bankrate.

Most HELOCs include an initial “draw” period—often 5 to 10 years—during which borrowers pay only interest on withdrawn amounts. After this period, a repayment phase (commonly 10 to 20 years) begins, requiring payments of both principal and interest. Consequently, monthly obligations can double once principal amortization starts.

“The real test comes when the repayment period kicks in, and the principal starts to show up,” Boneparth said. “Payments potentially could double overnight, and you really want to know that before you sign anything.”

Boneparth added that borrowers should consider the purpose of the funds. “If you’re borrowing against your home to improve the property, that can make sense,” he said. “Using home equity to pay off credit‑card debt is riskier because it converts unsecured debt into debt secured by your residence.”

He warned, “If your spending habits don’t change, you’re just moving the problem somewhere a little scarier.”

Source link