Rising mortgage rates keep home equity line of credit usage down
Despite available home equity shooting up in the first quarter, the share of total equity withdrawn by borrowers hit a four-year low, likely due to growth in interest rates, according to Black Knight.
The share of equity available to homeowners with mortgages increased 16.5% to $820 billion year-over-over and 7% to $380 billion quarter-over-quarter in the first quarter. This quarterly increase translates to a record high for Black Knight's analysis of tappable equity since the company began tracking this data in 2005.
Despite strong growth in home equity, less homeowners are taking advantage of available funds as only 1.17% of equity was tapped in the first quarter. This marks the smallest share of utilized equity since 1Q14 and the second lowest share since the onset of the housing recovery, according to Black Knight.
A driving factor behind the decline in usage of equity in the form of home equity lines of credit is "likely the increasing spread between first-lien mortgage interest rates — which are tied most closely to 10-year Treasury yields — and those of HELOCs — which are more closely tied to the federal funds rate," Ben Graboske, executive vice president of Black Knight's data and analytics division, said in a press release.
"As of late last year, the difference between a HELOC rate and a first-lien rate had widened to 1.5%, the widest spread we've seen since we began comparing the two rates 10 years ago. The distance between the two has closed somewhat in Q2 as 30-year mortgage rates have been on the rise, which does suggest the market remains ripe for relatively low-risk HELOC lending expansion," Graboske said.
Growth in interest rates, though down historically, still influenced homeowner borrowing decisions in the first quarter, and will likely further increase the standard interest rate in the third quarter as the Federal Reserve raised its target interest rate at its June meeting, according to Graboske.
Interest rate growth, along with higher home prices also caused the average monthly payment for a median-priced home with a 20% down payment to shoot up 14% in April from the start of the year.