One of the most enticing benefits of owning a home is getting to build equity in one. That equity can then serve as a cash source as needed, whether via a home equity loan, HELOC, or cash-out refinance.
Last year, home values rose substantially on a national level, and that led to a massive increase in home equity. Black Knight reports that as of late 2021, homeowners had amassed a collective $9.4 trillion in equity. And tappable equity -- the amount homeowners can access while still retaining at least 20% equity in their homes -- rose by 32% between 2020's third quarter and the third quarter of 2021.
All told, as of the start of 2022, the average mortgage holder had $178,000 in available equity. That's an uptick of $53,000 in equity over the previous 18 months. But will home equity levels continue to rise in 2022? Or have they peaked?
Why home equity levels probably won't go higher
Home equity is the difference between a given property's value and its mortgage balance. Last year, home values soared as buyers clamored to take advantage of low mortgage rates. But this year, we're in a very different mortgage rate environment, and there's a good chance rising rates will lead to a gradual but meaningful buyer pullback.
Although mortgage rates started off the year at competitive levels, they've risen sharply in the past month in particular. And with plans on the part of the Federal Reserve to raise its federal funds rate multiple times this year, we can expect mortgage rates to follow a similar pattern.
But rising rates are apt to push buyers out of the market as affordability issues arise. This holds true for everyday buyers as well as real estate investors who are in the market for income properties. And once that happens, home prices should start to come down, leaving homeowners with less equity to tap.
Now this isn't to say that homeowners should gear up for a worst-case scenario. Buyer demand is still quite strong right now, despite rising borrowing rates, so there's no reason to anticipate any sort of near-term housing market crash.
At the same time, it's pretty fair to say that home equity levels have largely peaked. And it's also reasonable to assume that they'll dip gradually as 2022 moves along.
Homeowners shouldn't wait to tap their equity
Homeowners today have a lot of options when it comes to putting their home equity to good use. In time, those options could wane. And so those looking to borrow against their homes or do a cash-out refinance may want to act quickly, especially as borrowing rates continue to climb. Homeowners looking to downsize should also consider listing their homes sooner rather than later, while property values are still high.
To be clear, it doesn't pay to tap home equity if that need doesn't exist. But consumers with high-interest debt, for example, may want to look at using a home equity loan or cash-out refinance to pay it off. And these are the consumers who should act sooner rather than later.