For a solid majority of homeowners, refinancing a mortgage in today’s market would mean replacing a low-interest loan with a new one at a significantly higher rate. The result? Higher monthly payments, reduced affordability and a less appealing financial situation overall. This homeowners’ reticence is what economists call the “lock-in effect,” and it’s positioned home equity products (HELOCs and closed-ends) as a more attractive alternative to traditional mortgage refinancing.
More than 75% of homeowners currently sit on a rate below 5% (see chart, left side), and with current mortgage rates hovering around 7%, refinancing would mean at least a 200 bp rate increase. That means mortgage rates would have to drop to around 4.375% before payment economics favored the traditional mortgage refinancing option (see chart, right side) – unlikely in the near term.
That’s what makes home equity products the smarter way to access cash. They offer homeowners not only the ability to preserve their low-rate first mortgage but also the flexibility and accessibility for how funds are used, whether for home improvements, debt consolidation or educational expenses. They also come with tax benefits. And clearly the equity is there. According to CoreLogic, total equity stands at almost $35 trillion, reflecting an increase of more than 125% since 2019.
Home equity loans are perfectly aligned with todays’ market conditions. That could make today the perfect the time for lenders to educate consumers about their many advantages and to offer competitive HE products tailored to their needs.
With the large majority of existing first mortgages at rates less
than 4.5%, the opportunity is ripe for home equity lending.
Source: LendersBenchmark FM Originations
