Why are home equity loans gaining popularity right now?

Record-low interest rates and a pandemic-fueled buying frenzy caused home prices to increase over the last few years, and the continued lack of inventory, the relocation of remote workers and other factors continue to keep those prices high. As a result, many homeowners are flush with equity in their homes.

According to a Q2 2023 report from real estate data firm ATTOM, 49% of mortgaged homes in the United States are "equity rich," with loan balances at 50% or less of their estimated market value. That's the highest equity level in four years, representing a 2% increase from Q1 2023.

Homeowners are now tapping into their home equity in numerous ways. Home equity loans are one option that's gaining popularity as homeowners seek to convert their equity into cash to use for home improvements, college tuition or other expenses. 

Get started by learning the home equity rates you can qualify for here now. 

Why are home equity loans gaining popularity right now?

Here are a few other reasons why many homeowners are utilizing home equity loans to address their financial needs.

Refinancing may not be the best option 

Before the pandemic, many homeowners seeking cash from their equity opted for cash-out refinances. With a cash-out refi, you replace your current loan with a new loan in a larger amount than you currently owe — ideally with lower interest rates. You then receive the difference between your old and new mortgages as cash, which you can use to improve your home, consolidate debt or address other financial needs.

However, interest rates are no longer at record lows. According to Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage is 6.81% as of July 27, 2023, making cash-out refinancing less attractive for many.

"With nine out of 10 homeowners locked into mortgage rates under 5%, few households can afford the double whammy of purchasing a more expensive home along with a mortgage rate that is more than two times their current rate," says Justin Goldman, co-founder and CEO at RenoFi, a TruStage Ventures portfolio company. "The natural conclusion millions of homeowners are coming to is that 'loving it' instead of 'listing it' is their only option. Home equity loans allow homeowners to borrow what they need for a renovation without having to refinance their first mortgage."

Find out more about the home equity rates you qualify for here now.

There's a lack of inventory

With so many homeowners choosing to stay put and keep their low-interest mortgages, homes for sale are in limited supply — so many homeowners are opting to tap into equity and renovate their current homes rather than sell and buy. Real estate brokerage Redfin reports that in May, the seasonally adjusted number of homes for sale nationwide was a mere 1.4 million, down 7.1% from a year ago. This figure represents the lowest inventory level since Redfin began tracking it in 2012.

"Given the lack of inventory in the country, we are witnessing more people taking money from these loans and improving their kitchens and baths," says Craig Studnicky, CEO of ISG World, a South Florida real estate firm. "Essentially, they're remodeling their homes because they can't find a substitute. Since they can't find anything new, a home equity loan allows them to fix and update what they currently own."

Less costly than other types of credit

Another reason that homeowners are turning to home equity loans is because it's more affordable than credit cards and other forms of credit. According to the most recent Federal Reserve data, the average credit card interest rate is 22.16%, with many cardholders paying rates upward of 30% or higher in interest. Considering that the average interest rate on a home equity loan is 8.49% — per Bankrate figures for July 28, 2023 — consolidating high-interest credit cards with a lower-interest home equity loan is a logical move for many homeowners.

Depending on your situation, you may benefit instead from a home equity line of credit (HELOC) with similar rates as home equity loans. A HELOC is a revolving line of credit that allows you to borrow against your home equity up to your credit limit as needed, only paying interest on the amount borrowed. In this way, a HELOC works much like a credit card. By contrast, a home equity loan provides you with a one-time lump sum of money and has fixed payments based on the loan amount. Get started by comparing home equity loan and HELOC rates you can qualify for right now.

The bottom line

Home equity loans are worth a look if you're looking for a way to finance home renovations, consolidate debt or pay for other household expenses. Lenders typically allow qualified homeowners to borrow up to between 75% and 85% of their home's equity, meaning that for every $100,000 in home equity, you may be eligible to borrow $75,000 to $85,000.

However, remember that a home equity loan requires using your home as collateral, so if you fail to make the repayments, you risk losing your home to foreclosure. Experts often advise considering home equity financing only when it improves your financial stability. For example, you might consider a home equity loan to fund home improvements that add value to your property.