Here’s a neat little fact that you may not have known before: Homeowners, as a whole, are currently sitting on more than $5.4 trillion in home equity.
That’s right, $5.4 trillion. Trillion.
As a refresher, home equity is the total amount of money a homeowner can borrow against their home, while still meeting a 20 percent investment in the property. Home equity is often used for refinancing purposes, to take out a loan for remodeling or renovation purposes, or to pay for a miscellaneous unexpected or expected expense (i.e., second home mortgage, college, consolidating debt, etc).
So, why is this $5.4 trillion number significant? Well, for starters, $5.4 trillion is about 10 percent more than what the usable equity was at the height of the housing market in 2005 prior to the great recession. If you recall back to that period, the housing market was booming and new construction was happening everywhere. If you want a sign that the housing market is in good shape, that’s a nice little bit of information to know, especially when you factor in that equity rose by $735 billion just in 2017 alone.
Secondly, the hot housing market is increasing the value of properties, which is another good thing when it comes to equity. The greater the home value, the greater the equity homeowners will have at their disposal.
So, just what does this record home equity amount mean, both now and in the future? Let’s take a look:
In the Present
In the present day, the rising home equity number basically translates to homeowners acting much more conservatively when it comes to taking money out against their homes. What’s more is that lenders are also a bit stricter in this manner, though home equity loans are typically one of the easier financing means to get approved for. For instance, last year homeowners only took out about $260 billion in home equity – and most of these were cash out refinances or lines of credit. Interest rates are increasing this year, so this might change a bit moving forward.
More Home Improvement
One of the biggest reasons why homeowners take out home equity loans – or lump sums of cash that they repay with interest over time – is for a home improvement project that they don’t want to dip into savings for or otherwise might not have the necessary means to pay for it in full at the time.
Right now, we’re in a seller’s market. That means that there’s a shortage of homes on the market, and sellers tend to have much more bargaining power than buyers when it comes to real estate transactions. Because of the seller’s market and shortage of available homes, more people are opting not to move and choosing instead to stay in their existing homes for longer periods of time. Noting this, expect more of these home equity dollars to go toward home improvement projects, such as additions, renovations and remodels.
Home buying optimism is low, yet home selling optimism is high – a key sign of a seller’s market. And with listings down in the double digit percentages from what they were a year ago, homeowners are likely to avoid moving and instead invest in their current properties. Remodeling this year is expected to increase about 7.5 percent from a year ago to close than $350 billion.
Types of Home Equity Loans
So, if you’re a homeowner who wants to tap in to some of your equity, you should know that there are two types of home equity loans: lump sum loans and lines of credit. Lump sum loans are exactly what they sound like, a big upfront cash amount that you pay back with interest over time. Line of credit home equity loans allow homeowners to only borrow what they need (yet still pay back with interest in time). The nice thing about line of credit loans is that homeowners can seek approval for the maximum amount and then come back several times throughout the course of a project to seek more money as they need it.
What’s your situation like? How much equity do you have in your home? With total equity at record highs, chances are it’s significant.