United States householders with mortgages have record equity of almost $5.4trillion to borrow against.
More than 80% of U.S. mortgage holders have available equity to tap via a first-lien cash-out refinance or home equity line of credit (HELOC). That is according to data specialist, Black Knight.
Data & Analytics Executive Vice President, Ben Graboske, says, “As of the end of Q3 2017, 42 million homeowners with a mortgage now have an aggregate of nearly $5.4 trillion in equity available to borrow against. That is an all-time high, and up more than $3 trillion since the bottom of the market in 2012.
However, recent changes to the U.S. tax code may have implications for homeowners wanting to use that equity. This is because interest on HELOCs is no longer deductible, increasing post-tax expense.
More than 80% have equity to tap
“Over 80 percent of all mortgage holders now have available equity to tap, whether via first-lien cash-out refinances or home equity lines of credit (HELOCs),” says Mr Graboske.
We’ve noted in the past that as interest rates rise from historic lows, HELOCs represented an increasingly attractive option for these homeowners to access their available equity without relinquishing interest rates below today’s prevailing rate on their first-lien mortgages.
“However, with the recently passed tax reform package, interest on these lines of credit will no longer be deductible, which increases the post-tax expense of HELOCs for those who itemize. While there are obviously multiple factors to consider when identifying which method of equity extraction makes more financial sense for a given borrower, in many cases, for those with high unpaid principal balances who are taking out lower line amounts, the math still favors HELOCs. However – assuming interest on cash-out refinances remains deductible – for low-to-moderate UPB borrowers taking out larger amounts of equity, the post-tax math for those who will still itemize under the increased standard deduction may now favor cash-out refinances instead, even if the result is a slight increase to first-lien interest rates!”
Pendulum likely to swing back
As rates continue to rise and the cost associated with increasing the rate on an entire first-lien balance rises as well, the benefit pendulum will likely swing back toward HELOCs, he says.
“Even so, the change could certainly impact HELOC lending volumes and loan amounts in the coming months and years. To a certain degree, the same question holds true for cash-out refinances, since tax debt for homeowners who will no longer itemize becomes generally more expensive without mortgage interest deduction in the equation. These refinances will likely be an attractive source of secured debt in the future, but increased post-tax costs may have a negative impact on originations. That said, it still remains to be seen whether and to what extent tax costs will impact borrower decisions in terms of either HELOCs or cash-out refinances.”
Number of ‘underwater’ borrowers falls
The increase in equity, driven by rising home prices, has also continued to shrink the number of ‘underwater’ borrowers who owe more on their mortgages than their homes are worth.
The number of underwater borrowers fell to 800,000 over the first nine months of 2017, a 37% decline in negative equity since the start of the year.
Only 2.7% of U.S. homeowners with a mortgage (approximately 1.36million borrowers) now owe more than their home is worth, the lowest such rate since 2006.
Even so, home prices in large portions of the country remain below pre-recession peaks. While 36 states and 70% of Core Based Statistical Areas (CBSAs) have now surpassed pre-recession home price peaks, 43 of the nation’s 100 largest markets still lag behind.