U.S. homeowners, some 48 million of them, are sitting on a record $17.6 trillion in total home equity and $11.5 trillion in tappable equity, according to Intercontinental Exchange.
Tappable equity means there is at least 20% equity in the property. For example, a $1 million home would have at least $200,000 of equity after any liens are considered.
Let’s drill down on tappable equity in California.
Statewide, homeowners have $3.269 trillion of such equity. That’s 28.1% of the nation’s $11.5 trillion in tappable equity.
Also see: How much wealth have Californians amassed?
Southern California homeowners in Los Angeles, Orange, Riverside, San Bernardino and San Diego counties have $1.645 trillion in this equity. That’s 50.3% of the state’s overall and 14.3% of the nation’s.
“California remains the epicenter for home equity lending opportunities with 28% of all equity nationwide residing in the state and nearly 10% of all equity held in the Los Angeles (and Orange County) market alone,” said Andy Walden, head of mortgage and housing market research at Intercontinental Exchange. “The average Los Angeles mortgage holder has more than $630,000 in tappable equity available to borrow against while maintaining a 20% equity cushion.”
San Jose leads the state with an average $850,811 in tappable equity per borrower. The Los Angeles/Orange County metro area is second with $634,893 per average borrower. San Diego County is at $513,456, and the Inland Empire $226,994.
Demand has increased in the first quarter of the year, with $45 billion of equity withdrawals nationwide — the highest Q1 volume since 2022, according to Intercontinental Exchange.
Also see: Southern California home prices rise even as buying sputters
Before I get you into a lather about all the ways you can tap your home equity, let’s talk about need versus want.
Here are some good reasons to tap that equity: You carry substantial credit card debt with high interest rates, want to do home improvements or make a down payment on a rental property.
The wrong reasons: Paying for a vacation or want some mad money, for example.
Again, do you really need the money, or do you just want the money? Do not think about your home equity as a piggy bank. That’s a slippery slope.
As an aside, it is an excellent idea to put a home equity line-of-credit against your home just to have it there in case of emergency. For example, say you unexpectedly lose your job. Having the HELOC at the ready can be a blessing. If you try to qualify for a HELOC after losing your job, you won’t get approved.
It’s also important to know whether the home equity you tap out is tax deductible.
The interest is currently tax deductible if the funds are used to buy, build or substantially improve the home that secures the loan (renovations or improvements). You can deduct interest on loans up to $750,000 for married couples filing jointly, and $375,000 for married couples filing separately. This limit includes all residential debt, such as mortgages and home equity loans, according to Jeff Hipshman, a certified public accountant and partner at Eide Bailly.
More than 60% of all U.S. homeowners who hold mortgages have a mortgage rate under 4%. Thank you, Covid and Jerome Powell. Few want or need to refinance their first mortgage, especially with current rates hovering around 6% to 7%.
So, many folks I talk to are looking at second loans, of which there are two kinds.
One is the previously mentioned HELOC. The interest rate for this loan adjusts based on the prime rate and a profit margin added to that rate. The HELOC typically allows for minimum, interest-only payments for the first 10 years. You also can borrow and pay it back in those first 10 years, just like a credit card. The remaining, say 20 years, requires amortizing the remaining balance on your monthly payments.
The other is a HELOAN or home equity loan, which is a fixed-rate second lien. You are required to take all the money out at once. The interest rate is fixed, and the balance is amortized over the term of the loan. HELOANS are typically amortized over 15, 20 or 30 years.
HELOCs can go up to 95% combined loan-to-value. For example, say your home is worth $1 million. You owe $600,000 on your first mortgage. You could get up to $350,000 on a HELOC, totaling $950,000 of liens.
Home equity loans can go to 90% combined loan-to-value.
Qualifying is like the Wild West. You can use tax returns and W-2s to qualify. For the self-employed you can also qualify based on bank deposits.
You can do owner-occupied second liens or non-owner occupied second liens.
The lowest middle FICO credit score of all borrowers can go as low as 640 on HELOCs and 680 for home equity loans.
HELOC rates range from prime only (currently at 7.5%) to 13%, depending on your combined loan-to-value and FICO score, occupancy type (primary, second home or investment property) and property type (condos, single family or 1-4 units).
Home equity loans can be had as low as 6.875% to 14%, again, depending on the same parameters as HELOANS.
Freddie Mac rate update
The 30-year fixed rate averaged 6.85%, 4 basis points lower than last week. The 15-year fixed rate averaged 5.99%, also 4 basis points lower than last week.
The Mortgage Bankers Association reported a 3.9% mortgage application decrease compared with one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $76 more than this week’s payment of $5,285.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.875%, a 15-year conventional at 5.625%, a 30-year conventional at 6.375%, a 15-year conventional high balance at 5.99% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year high balance conventional at 6.75% and a jumbo 30-year-fixed at 6.625%.
Eye-catcher loan program of the week: A 40-year fixed rate mortgage, interest-only for the first 10 years at 6.625% with 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.
