Homeowners borrowed $23 billion against home equity lines of credit in the third quarter, marking the largest quarterly increase since 2005, according to a Federal Reserve Bank of New York report released Tuesday. Outstanding HELOC balances now total $481 billion, continuing an 18-consecutive-quarter climb.
The surge reflects homeowners' efforts to access cash while keeping their low mortgage rates. Nearly half of all outstanding mortgages, 49.1%, carry rates of 4% or lower, making homeowners reluctant to sell and refinance at today's 7.3% average rate on 30-year mortgages.
HELOCs allow borrowers to draw money over time instead of receiving a lump sum. The average interest rate for a $30,000 HELOC stood at 7.49% as of November 4, according to Bankrate. Unlike fixed-rate mortgages, HELOC rates are variable and move with the prime rate, which the Federal Reserve influences through changes to the federal funds rate.
Certified financial planner Douglas Boneparth cautioned borrowers about two risks. First, variable rates mean payments can climb if rates rise. "If your budget only works at today's rate, then your budget doesn't really work," Boneparth said. Second, many HELOCs have a five or 10-year draw period when borrowers pay only interest, followed by a repayment period of 10 to 20 years when principal payments begin. "Payments potentially could double overnight," Boneparth said.
Boneparth said using a HELOC to improve your home "could make a lot of sense," but borrowing against your house to pay off credit cards is "trickier because you're turning unsecured debt into debt secured by the roof over your head."
Homeowners collectively held $17.5 trillion in home equity in the third quarter. Average tappable equity, meaning equity that could be borrowed against while maintaining at least 20% equity in the home, reached $204,000 per borrower, up $16,600 from a year earlier.