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More homeowners – and lenders – are turning to home equity loans and lines of credit in the face of historic levels of tappable equity and rising mortgage rates that make cash-out refinances unattractive. 

“If [homeowners] want to get the equity out of their homes, the most affordable way to go is to get the home equity line of credit,” said Barbara Yanke, senior vice president and director of residential lending at Leominster-based Fidelity Bank. “People have really been deciding that’s the better way to gain that extra equity they now have in their home with the appreciated values; it’s the best way to gain access to that and leave their first mortgage alone.” 

The historically low interest rates in 2020 and 2021 have left 73 percent of homeowners nationwide with a mortgage rate below 4 percent, according to John Burns Real Estate Consulting.  

Some of the traditional reasons borrowers open HELOCs include house repairs and debt consolidation. With more rate hikes expected as the Federal Reserve attempts to bring down inflation, HELOCs could become a key resource as borrowers look for ways to manage expenses and finances.  

Record Equity to Tap 

HELOCs provide homeowners with access to a line of credit, similar to a credit card. Not everyone who applies for a HELOC ends up accessing funds.  

Amy Horan, senior vice president and chief lending officer at Needham-based Direct Federal Credit Union said some homeowners open HELOCs to make sure they have access to money for unexpected costs. While Direct Federal has seen a spike in HELOCs this year, she added, the usage rate remains consistent with previous years at around 40 percent.  

The products usually come with an introductory rate for a period followed by a variable rate. During the period when homeowners can draw funds, only interest and fees need to be paid. 

About 31,600 home equity loans or lines of credit were issued in Massachusetts in the first seven months of 2022, up 34 percent over the same period in 2021 according to The Warren Group, publisher of Banker & Tradesman. Refinances during that period dropped 63 percent year-over-year.  

The last time lenders saw mortgage rates increase was 2018, when Massachusetts had more than 46,400 home equity loans and lines of credit.  

But the situation facing borrowers today is different. 

“Home equity per homeowner is much higher than it was back then,” said Eric Finnigan, vice president of research and demographics at John Burns Real Estate Consulting.  

The Greater Boston area had a total of $255.76 billion in tappable home equity in July, according to Black Knight, a mortgage technology and data provider. That amount has increased since the first quarter of 2022, when the area had $241.97 billion in tappable equity. Other areas in Massachusetts have also seen amounts of tappable home equity climb this year.  

The current rising rate environment also has more homeowners who recently refinanced compared to 2018, Finnigan added.  

Massachusetts has seen 34 percent more HELOCs issued year-over-year in 2021, but 63 percent fewer refinances according to The Warren Group, publisher of Banker & Tradesman.

Remodeling Financing Likely Needed 

“I think we’re in a particularly interesting time in history right now just because of the record high home equity levels and because of all those homeowners that hold very low mortgage rates that are likely to stay in homes much longer and turn to remodeling rather than moving,” said Matt Saunders, John Burns Real Estate Consulting’s senior vice president of building products research. 

Lenders have traditionally seen home repairs and renovations among the top reasons for customers to seek HELOCs. Finnigan said his research has already shown an increase in HELOCs being used nationwide to fund remodeling projects. 

With first mortgages locked in at record-low rates likely keeping many borrowers in their homes, Saunders said, the housing stock has also reached a point where many homes will be at a prime remodeling age, spurring more home improvement projects.  

The higher levels of home equity could help homeowners keep their first mortgage and use HELOCs to pay for larger projects that typically would have been funded with cash-out refinances, Saunders said. He added that research has shown that rather than smaller do-it-yourself tasks, larger projects have been driving remodeling activity this year. 

Even with the trend toward increased use of HELOCs, some larger projects could end up benefiting from a cash-out refinance, Saunders said. 

“I do think as rates rise, it’s going to increase the cost of borrowing associated with those variable rates [on HELOCs],” Saunders said. “So, there’s not going to be a complete substitution from the refis to the HELOCs; there’s going to be some associated cost of financing weighing on those larger remodels.” 

Home Office HELOCs 

Some of that remodeling is spurred by the large-scale adoption of working from home. Horan, with Direct Federal Credit Union, said building out home-office spaces was a key driver for borrowers using HELOCs this year.  

Even though borrowers have seen their home values appreciate, the lack of housing inventory and high prices have made selling a less affordable option compared to remodeling existing homes. 

The $806 million-asset Direct Federal has opened record numbers of HELOCs each month since May, Horan said.  

Diane McLaughlin

“They’re less afraid to go and have a second mortgage at a variable interest rate than having their first mortgage at a variable interest rate,” Horan said. 

The credit union’s HELOC also comes with an option to convert some of the balance to a home equity loan with a fixed rate, Horan said, adding that customers have already taken advantage of this feature. 

In addition to home repairs and remodeling, another key driver of HELOC activity has been debt consolidation, said Yanke, who recently joined Fidelity Bank from Hometown Financial Group. 

With interest assessed only on the amount drawn from the HELOC and – unlike refinances – few if any fees, Yanke said customers have been taking out lines of credit even as interest rates rise. 

“This is a chance for them to be able to capture that equity in case they should need it for future use,” Yanke said.