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Why high interest rates make it tough to tap home equity

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Home equity is near all-time highs. But tapping it may be tough due to high interest rates, according to financial advisors.

Total home equity for U.S. mortgage holders rose to more than $17 trillion in the first quarter of 2024, just shy of the record set in the third quarter of 2023, according to new data from CoreLogic.

Average equity per borrower increased by $28,000 — to about $305,000 total — from a year earlier, according to CoreLogic. Chief Economist Selma Hepp said that’s up almost 70% from $182,000 before the Covid-19 pandemic.

About 60% of homeowners have a mortgage. Their equity equals the home’s value minus outstanding debt. Total home equity for U.S. homeowners with and without a mortgage is $34 trillion.

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The jump in home equity is largely due to a runup in home prices, Hepp said.

Many people also refinanced their mortgage earlier in the pandemic when interest rates were “really, really low,” perhaps allowing them to pay down their debt faster, she said.

“For the people who owned their homes at least four or five years ago, on paper they’re feeling fat and happy,” said Lee Baker, founder, owner and president of Apex Financial Services in Atlanta.

Baker, a certified financial planner and a member of CNBC’s Advisor Council, and other financial advisors said accessing that wealth is complicated by high borrowing costs, however.

“Some options that may have been attractive two years ago are not attractive now because interest rates have increased so much,” said CFP Kamila Elliott, co-founder of Collective Wealth Partners and also a member of CNBC’s Advisor Council.

That said, there may be some instances in which it makes sense, advisors said. Here are a few options.

Home equity line of credit

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A home equity line of credit, or HELOC, is typically the most common way to tap housing wealth, Hepp said.

A HELOC lets homeowners borrow against their home equity, generally for a set term. Borrowers pay interest on the outstanding balance.

The average HELOC has a 9.2% interest rate, according to Bankrate data as of June 6. Rates are variable, meaning they can change unlike with fixed-rate debt. (Homeowners can also consider a home equity loan, which generally carries fixed rates.)

For comparison, rates on a 30-year fixed-rate mortgage are around 7%, according to Freddie Mac.

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While HELOC rates are high compared with the typical mortgage, they are much lower than credit card rates, Elliott said. Credit card holders with an account balance have an average interest rate of about 23%, according to Federal Reserve data.

Borrowers can generally tap up to 85% of their home value minus outstanding debt, according to Bank of America.

Homeowners can leverage a HELOC to pay…

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