Homeowners have equity in their homes, but it’s getting more expensive to tap

Rising home prices and rents have created an affordable housing crisis for many low-income Americans, but for homeowners who survived the crisis or bought their homes a few years ago, it’s leading to a different outcome—additional wealth.

Homeownership has long been a vital wealth-building tool for middle-class Americans, and with a housing shortage pushing prices ever upward, homeowners have more and more untapped equity in their homes.

Home equity is the difference between what the home is worth and the amount still owed on the home’s mortgage. Because home values keep going up and mortgages generally shrink as payments are made, homeowners have more equity in their homes that can be converted to cash by refinancing the mortgage or taking out a home equity line of credit.

A new report from CoreLogic from the fourth quarter of 2017 shows mortgages in the United States saw home equity increases of 12.2 percent compared to a year ago, or an average of $15,000. The gains were led by western states such as California ($44,000 gain), Washington ($40,000 gain), and Nevada ($27,000).

These gains represent a staggering $908.4 billion growth in home equity nationally in just one year, contributing to the record-setting level of American wealth, which according to the Federal Reserve has reached $98.74 trillion.

Furthermore, the number of Americans who have negative equity in their mortgage, which is defined as a home worth less than what is owed on the mortgage, decreased 21 percent from the end of 2017 compared to the previous year. This pushed the number of mortgages with negative equity down to just 4.9 percent of all mortgages in the US.

The number of mortgages with negative equity varies from state-to-state and market-to-market, however. Louisiana (10.4 percent), Connecticut (8.5 percent), Illinois (8.9 percent), and Nevada (8 percent) show higher levels of negative-equity mortgages. High levels of negative equity in the metro areas of these states is what’s driving the state-wide numbers. The Miami metropolitan area has a negative equity rate of 13.1 percent, Chicago’s is 10.1 percent, and Las Vegas’s is 9.2 percent.

When there’s a bunch of equity built up in a house, the owner will often refinance their home to get some of the money out of it, what’s known as “cash-out refinancing.” Others might take out a home equity line of a credit, which is a loan where the collateral is the equity in your home.

Homeowners often use this money to pay for large expenses related to their homes, such as remodeling a kitchen or bathroom, adding a swimming pool, or replacing the roof. Some others might take that money and just go to Vegas.

But despite the home equity gained in 2017, a new report from ATTOM Data Solutions shows that home refinancing has dropped for three straight quarters and is down a whopping 34 percent in Q4 2017 compared to the previous year. That’s because the rise in home equity has been met with a rise in interest rates over the last year.

When a homeowner refinances their mortgage, it will be financed at the going rates. For a lot of homeowners, mortgage rates are currently higher than the one they got on their original mortgage, meaning if they refinance now, it could lead to higher monthly payments and ultimately eat into the home equity they’ve gained.

Since the financial collapse, total home refinances have moved inversely with interest rates. When interest rates go up, refinances go down, as homeowners wait until it’s less expensive to tap into that added home equity.

“It seems like that 4 percent (interest rate) level is an important level for [the refinancing] market,” said Daren Bloomquist, a senior vice president at ATTOM Data Solutions. “When interest rates are hovering at or above 4 percent, we really see weakness in the refi market, and that’s what they’ve been close to over the last year. That’s impacting these weaker refi numbers.”

If homeowners are waiting for rates to go back down before refinancing, it might be awhile, as interest rates are expected to continue to rise for the foreseeable future. Furthermore, the tax bill Congress passed in December adds another layer of uncertainty.

It lowered the cap on mortgage-interest deductions (MID) from $1 million to $750,000 worth of mortgage debt, but mortgages signed before the law took effect this year are not subject to the new cap. This means if a homeowner refinances now, they may lose the ability to deduct a portion of their mortgage interest from their taxes if their mortgage debt is over $750,000.

Most homeowners don’t have that much mortgage debt, so it doesn’t affect them. The new cap has the most impact on high-cost coastal markets like San Francisco and New York City. However, some of those areas saw the highest of the gains in home equity over the last year and would normally be more motivated to refinance.

But with rising interest rates and the new MID cap, it’s getting more expensive to tap home equity, and more homeowners might decide to just wait.