Homeowners originated nearly 20% more second mortgages and home equity lines of credit in the second quarter compared with a year earlier, as elevated mortgage rates keep millions of borrowers locked into their current homes and out of the upgrade market.
The surge in equity borrowing reflects a math problem facing anyone who bought or refinanced when rates were near historic lows. Roughly 60% of outstanding U.S. mortgages carry rates below 4%, while the average 30-year fixed rate has hovered near 7% for most of 2024, according to Freddie Mac data. Selling and buying a similarly priced home at today's rates can add hundreds of dollars to a monthly payment, so many owners are choosing to stay and renovate instead.
That decision is colliding with the rising cost of the renovations themselves. Home equity lines of credit typically carry variable rates tied to the prime rate, which sits at 8.5% after the Federal Reserve's rate hikes, meaning a $50,000 HELOC can cost borrowers more than $350 a month in interest alone at current averages. Second mortgages, meanwhile, often come with fixed rates in the 8% to 9% range, well above the 3% to 4% rates many first mortgages carry.
The result is a housing market frozen at both ends. Existing-home sales fell to a seasonally adjusted annual rate of about 4 million in recent months, the weakest pace since 2010, according to National Association of Realtors data. Inventory remains historically tight because would-be sellers with cheap mortgages have little financial incentive to list, which in turn keeps prices elevated for the buyers who remain in the market.
Lenders have noticed the shift. Non-bank mortgage originators and banks have expanded HELOC products and marketing in response to the demand, and total home equity lending volume has climbed back toward levels last seen before the 2008 financial crisis, according to industry tracker Inside Mortgage Finance.
Economists caution that tapping equity carries risk if home values decline. During the 2008 downturn, millions of borrowers who had borrowed against inflated home values ended up underwater on both their first and second liens. Current lending standards are tighter than they were then, with most HELOC borrowers required to hold at least 15% to 20% equity after the loan closes.
For now, the lock-in effect shows little sign of breaking. Economists at Fannie Mae and the Mortgage Bankers Association project the average 30-year rate will stay above 6% through 2025, well above the level that would tempt most low-rate borrowers to move.
