Americans hold about $11 trillion in home equity. They just took $47 billion of it in three months, and most kept their cheap old loans while they did.
Most owners who borrowed last quarter did not give up their cheap first loans. They turned to HELOCs - lines of credit you can draw on as needed - and home equity loans, which made up 54% of the $47 billion pull, per a new report from Intercontinental Exchange.
Around two in three of those second-loan borrowers locked in their first loans between 2020 and 2022. Rates back then ran 3% to 4%, while the average new 30-year sits near 6.5% today.
A swap of a 3% loan for a 6.5% one rarely makes sense, so owners are stacking a new loan on top instead.
Q1 pulls dipped from $49 billion in Q4 but were still the most for any first quarter since 2021. Cash-out refis made up the rest, and they bring closing costs that run 2% to 5% of the new loan.
Almost half of cash-out refis came from owners who got their loans in 2023 or later, when rates were already high. Another fourth came from owners willing to give up cheap pandemic rates to get cash now.
Every weekday morning, Market Briefs breaks down what moves like this actually mean for your portfolio - in five minutes a day, plus a free 45-minute investing masterclass when you join.
The median U.S. home is worth about $429,300 today. That is up roughly 51% from May 2020, and the price boom built nearly all of the current equity.
Owners did not earn it. The market handed it to them.
But "home equity is not free money," said Joon Um, a planner at Secure Tax & Accounting in Beverly Hills. Advisors say the reason for tapping equity needs to justify the cost.
Home repairs and upgrades usually clear that bar. A summer trip usually does not.
Roll the trip into a 15-year loan and you could pay interest on it long after the suntan fades.
HELOCs come with one more catch. The draw period often lasts five or 10 years, and owners pay only interest during that span.
Once the draw period ends, the loan flips. Borrowers then owe both interest and principal, and the bill jumps fast.
The average rate on a $30,000 HELOC is now 7.43%, per Bankrate. A five-year home equity loan averages 8.12%, and a 15-year one runs 8.2%.
HELOC rates also move up and down with the prime rate. That means a Fed shift could push the monthly bill higher even on a loan you have already taken out.
The lock-in effect won't fade while rates stay above 6%. That keeps owners reaching for second loans instead of giving up the cheap loans they got in the pandemic.
Big banks have noticed. They have been quietly chasing HELOC borrowers, and the Q1 data shows the pipeline is real.
Most of that $11 trillion is going to stay parked.
Join 350,000+ investors reading Market Briefs every morning - and grab a free 45-minute investing course thrown in when you sign up.
