Since the COVID-19 pandemic began, the real estate market has been thriving, which has resulted in higher home values and more interest among buyers. Over time, interest rates have also risen. Along with a lower threat from the COVID-19 pandemic, the housing market is experiencing additional changes, which has caused home equity loans to become increasingly popular in recent months. Here’s why homeowners are applying for home equity loans at a higher rate.

Interest Rates are On the Rise

Mortgage interest rates have been on the rise since the beginning of 2022. While the Federal Reserve is no longer increasing rates as quickly as they had been, buyers are still presented with interest rates that are around 6%-8% for a fixed-rate mortgage that has a 30-year term. The national average for this type of loan is currently 6.95%.

Since interest rates will likely remain high for the foreseeable future, less homeowners will have the ability to reduce their monthly mortgage payments with a refinance. In this scenario, homeowners may instead choose to take cash out of their home via home equity loans.

In the initial two quarters of 2022, more than 800,000 home equity loans were originated, which is the highest level for these financial products since 2007.

When a homeowner applies for a home equity loan, they are given access to the equity they’ve built up over the years by paying off their initial mortgage loan. Obtaining this type of loan doesn’t cause interest rates to increase on your existing mortgage.

Home Values are Still High

Home values have been consistently increasing since the Federal Reserve dropped interest rates in 2020. While interest rates have risen since then, buyer demand hasn’t cooled off at the same rate. In quarter four 2021, the median sale price for a home in the U.S. was $423,600. Once year later, the median sale price was $467,700, which indicates that prices are still on the rise. Even though the rate of growth has slowed, homes have yet to drop in value.

The average amount of funds that homeowners have access to is over $175,000, which means that these individuals can obtain a large portion of money by tapping into this equity. Once the owner is approved for a home equity loan, they can use the money to pay down some of their debt, complete home improvement projects, or fund a vacation.

Keep in mind that the general increases in home values vary depending on where you live. Homes throughout the Northeast experienced smaller increases when compared to homes located in the South.

The amount of local buyer demand that occurs in a market will determine how quickly homes in the area appreciate in value. In certain destinations, luxury homes will appreciate at a faster rate than the rest. In other cities, however, appreciation occurs at a quicker rate with entry-level homes.

Supply Issues Make Potential Buyers Hesitant to Enter the Market

Ever since COVID-19 started, the demand for homes among buyers has far outstripped the available supply. Along with the fact that owning a home is highly appealing, less owners are looking to place their property on the market because of the rise in work-from-home options. Employees aren’t being asked to relocate as often to a completely new city, which means that they can work remotely without issue.

Supply issues have occurred in nearly every aspect of the economy. When the economic stimulus package was signed into law, demand for products grew, which resulted in clogs occurring throughout U.S. ports. These clogs are still largely present. Labor shortages are also creating issues with the supply chain. While some improvements have been made, supply chain problems could persist for the rest of this decade.

These issues are present in the housing industry as well. Construction crews have been finding it more challenging to source the materials they need to build new homes. As a result, the construction of new homes has slowed considerably.

While builders and construction crews are applying for building permits at a high rate, labor, weather, and supply issues are bottlenecks that are difficult to overcome during the development process. It may take anywhere from five to eight years to balance supply and demand.

Because of the highly competitive market and the constraints of new supply, many homeowners are choosing to improve their property instead of selling it and searching for a new home themselves.

In 2021, around 25% of all homeowners chose to refinance their existing mortgage because of the exceedingly low interest rates. While the percentage of homeowners who refinanced was high in 2021, the refinance boom came to an end in 2022.

Even though refinancing is no longer as beneficial, the high equity that many homeowners have built up can be obtained through a home equity loan. As long as interest rates remain high, home equity loans should be more popular than refinancing.

Homeowners Need Access to Additional Funds

Throughout the pandemic, the government issued several rounds of stimulus payments to millions of people across the U.S. All three rounds of stimulus payments totaled $812 billion. Even though these payments helped Americans navigate the challenges brought about by workplaces being shut down, some individuals benefited from receiving high amounts of cash while working from home.

In the months that followed these payments, the economy was stimulated as a result of an increase in spending. The boost in customer spending also created a large uptick in home improvement projects. Since people were spending a considerable amount of time in their homes, many of them decided to fund projects that would improve their homes and increase property value.

These stimulus payments have now run out. However, the need for cash is still there, which is why many homeowners are looking to remove cash from their homes via a home equity loan.

All signs indicate that home equity loans are here to stay throughout the remainder of 2023. Since homeowners are unable to lower their monthly payments with a refinance, they may look to home equity loans as a method of obtaining cash that will help pay off other types of debt or make improvements that will increase the value of their homes.