The inaccessibility of home equity

HELOCs are inaccessible to nearly half of homeowners who apply, and remaining traditional avenues can double monthly payment. 

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Point’s newest analysis shows an alarming trend—many U.S. homeowners don’t have a clear path to accessing their home equity. Riding the wave of rising real estate values, homeowners in the U.S. are sitting on near-record-high levels of home equity. While homeowners can find comfort that the largest investment they’ll make in their lifetime is gaining value, many are left out in the cold when it comes to accessing the equity they’ve spent years earning, leaving them unable to enjoy these gains until they sell their home.

Where we are

U.S. homeowners’ equity has increased 64% in the past five years, up to $29.3 trillion in Q1 2023. These gains were primarily driven by the increase in home prices, up 56% over the same period. Tappable home equity—the amount of home equity one can access while maintaining a 20% equity stake—also saw growth in Q1, up 9.8% year-over-year and 55% over the past five years. 

On paper, it’s a great time to own a home and grow net worth, but it’s like having a debit card and never being given a PIN. Homeowners are experiencing great difficulty accessing their equity when needed—and some people’s circumstances mean the odds may be against them. While homeowners’ equity has increased by 241% over the past 10 years, the outstanding loan balances for home equity loans and HELOCs have decreased by 48% over the same time period.

Why is it so tough? 

The most common avenues to access home equity have significant bottlenecks. When mortgage rates dipped below 3% years ago, cash-out refinances were common avenues for homeowners to access their equity. However, cash-out refinances are less attractive now that mortgage rates are at their highest levels in 21 years, which is holding homeowners back. 

Here’s what it might look like for a homeowner who opts for a cash-out refinance in today’s rate environment:

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Scenario:

A homeowner purchased the median-priced home for $310,600 in August 2020 with 20% down. Given prevailing 2.91% 30-year fixed mortgage rates, the monthly payment was $1,035. Three years later, the home value has increased 40% to $435,000, and the homeowner now has $204,661 of equity in their home. They need to access $50,000 of this home equity for a home renovation, and their only option is a cash-out refinance. Given current mortgage rates of 7.19%, the monthly payment would more than double to $2,541.

This means that the homeowner would need to pay a staggering $542,160 more over the life of the mortgage to access an extra $50,000 cash today through a cash-out refinance.

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So, what other options exist for today’s equity-rich homeowners outside of costly cash-out refinances? Reverse mortgages are an option for homeowners who meet the Federal Housing Administration (FHA) standards set out in the Home Equity Conversion Mortgage (HECM) program. HECMs allow access to equity via a line of credit or a lump sum, but it’s important to understand that they aren’t for everyone: they have an age minimum of 62, homeowners must pay off their mortgage fully, and the loan is not assumable by heirs. 

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HELOCs and home equity loans are the most common way to tap home equity, but they are hard to get, and nearly half of homeowners fail to qualify. The denial rates for HELOCs are 46%, compared to 12% for a conventional mortgage. 

Lenders generally require a credit score of at least 680, although many prefer a score above 720. While some lenders may accept a score lower than 680, the borrower’s financial profile must be exceptional in other areas. For comparison, according to the Federal Reserve Bank of New York, more than 25% of homeowners taking out a mortgage today have a credit score under 710, and 10% have a credit score under 650. 

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Of course, many homeowners who have taken out a mortgage in the past have since run into financial hardship and have seen their credit scores suffer as a result. This is not just a hypothetical - 25% of all Americans have a credit score under 650, according to FICO. As a result, accessing home equity via a HELOC or home equity loan may be difficult or even impossible for homeowners who do not have Prime or better (660+) credit. Not surprisingly, the average FICO score for homeowners with a HELOC is 748¹ (“very good”), which is 34 points higher than the average American’s credit score. 

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Lack of adequate income is another barrier to accessing home equity, given stringent debt-to-income requirements (typically 43% to qualify for HELOCs and home equity loans). Many working Americans do not receive verifiable income – the standard method for proving sufficient income – as an estimated 15 percent of the workforce are independent contractors. These workers are subject to stringent documentation to prove sufficient and steady income – if they qualify at all. In addition, more than 48 million Americans are retirees receiving social security income, and more than 6 million people are unemployed. Many will simply not have adequate income to meet DTI requirements.

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Point founder and CEO Eddie Lim encountered these restrictions first-hand while trying to get a HELOC for his home. Fresh on the heels of selling another company, Lim attempted to get a HELOC for a home renovation, only to be denied because of his lack of reportable income. This experience led him to start Point to help more people access their home equity. 

Why it matters

Due to market uncertainty, Americans are finding themselves in a more precarious financial situation. Total credit card debt just passed $1 trillion for the first time, savings rates are down sharply from pandemic-era peaks, and prices across all categories are still at all-time highs even as inflation slows. Homeowners are sitting on a huge asset to help improve their financial health – their home equity –  but many unfortunately cannot access it. 

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People tap their home equity to do various things—fund home renovations, start businesses, or pay off higher-interest debt, for example. Homeowners are stuck and stressed with less ability to access their home equity and leverage those funds.

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Homeowners shouldn’t have to climb over barriers to access their home equity—they’ve already earned it via hard work and disciplined saving. This data shows that accessing home equity is too difficult for too many Americans today.