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There’s good news for homeowners! New research reveals rising home values have boosted equity for many homeowners, increasing how much they may be able to borrow:
A recent report reveals an impressive 44.6% of mortgaged residential properties are currently “equity rich,” which means they owed no greater than 50% of their property’s estimated market value.
That’s a major jump from the 26.5% observed right before the pandemic hit – which means average homeowner equity stakes have increased nearly 142% nationwide since 2020…
“This jump from about 26% to nearly 45% of mortgaged homes being equity rich is one of the biggest shifts in American household wealth I’ve seen in my career,” says personal finance expert Andrew Lokenauth. “That’s not a small nudge – it’s a structural change. What this report is really telling us is that tens of millions of homeowners now sit on a financial cushion that flat-out didn’t exist five years ago.”
Erik, Leland, a real estate broker with Realty First in Lake Oswego, Oregon, seconds those sentiments.
“If you zoom out, the findings represent a massive change in how we look at middle-class household wealth,” he explains. “Seeing that the number of equity-rich homeowners is so much higher than it was pre-pandemic is remarkable.”
Factors behind this trend
Eric Bernstein, president/cofounder of LendFriend Mortgage, says there’s a big reason why so many homeowners nowadays enjoy a bountiful bed of equity.
“This is a testament to the unprecedented financial situation homeowners are in, having accumulated this wealth during the pandemic housing boom, where housing prices rose by 30% to 50%,” he explains. “Millions of homeowners leveraged historically low mortgage interest rates during this boom. When rates rose by 4% or more after 2022, many homeowners did not abandon ship and sell their homes. They continued to make mortgage payments on houses that are worth much more than they paid for.”
Additionally, plenty of homeowners made home improvements and renovations over the last few years, which further improved their home equity positions.
“Remember, as well, that a lot of homeowners refinanced into low fixed rates a few years ago, which encouraged them to stay put longer and continue building equity,” notes Taylor Kovar, a Certified Financial Professional.
Combine that with the fact that few want to trade a 3% mortgage for a 6% or higher mortgage (what experts call the “lock-in effect”), and it makes sense that equity continues to compound for millions of property owners who have yet to list their homes for sale.
How increased home equity equals more borrowing power
Home equity represents available capital based on your loan-to-value percentage. Typically, up to 80% to 85% (depending on the lender) of your home’s value is available to borrow by tapping your equity.
“Let’s say you purchase your home for $500,000 with a mortgage of $400,000. Then, you reduce your mortgage balance to $360,000 over a few years; meanwhile, over that time, your property increases in value to $700,000. An 80% loan-to-value means you can borrow up to $560,000 of your home’s current higher value. Because you still owe $360,000 on your mortgage, that means you can access up to $200,000 of your home’s equity,” continues Bernstein.
Many opt to liquidate home equity via a home equity line of credit (HELOC) or home-equity loan…
“HELOC originations have picked up lately,” says Lokenauth. “That’s logical, as it often doesn’t make sense to refinance your entire mortgage when you can carve off just what you need at a lower blended cost. Cash-out refinances are far less attractive today because most homeowners hold fixed mortgage rates below 4% that they’re not willing to give up. Home equity loans and HELOCs are the better play in this rate environment because they are more flexible.”
To learn why and when you should consider tapping into your home’s equity, click here.
Tapping into your home’s equity means borrowing against your home, so it’s important to weigh your budget, repayment plan, and long-term financial goals before moving forward. Just because you have more financial leverage, it does not mean you have to use it. But it certainly leaves you with options…