Colorado homeowners who are tapping their home equity this year aren’t holding back, borrowing about 50% more on average than consumers in other states.
“People are chomping at the bit to get home equity loans,” said Jacob Channel, a senior economist with LendingTree, which studied how much people are borrowing against their home equity on its online lending platform. Nowhere are they chomping more than in Colorado.
It is rare to see home equity loans above $150,000 or even $100,000 and the U.S. average this year is $83,872, Channel said. But in Colorado, the average is $128,482 this year, the highest of any state.
After Colorado, the next highest loan averages are in Hawaii at $119,172 and Connecticut at $112,721. At the other extreme is Iowa, where the average home-equity loan amount this year is $30,904, followed by Alabama at $55,098 and Nebraska at $56,509.
Home equity loans, because they come behind mortgages for repayment after a default, carry a higher risk for lenders and a higher interest rate to compensate. And that rate can vary based on location, more so than with mortgages. LendingTree found that the home equity loans issued this year had an average interest rate of 8.47% in Alaska, while in Maryland, the lowest-cost state, the average was 4.55%.
In Colorado, the average interest rate charged was 5.2%, on the lower end of the scale, but Channel cautioned that rate includes loans made earlier in the year when borrowing costs were much lower. Someone borrowing against home equity today should expect to pay more.
LendingTree only studied home equity loans, which carry a fixed rate, rather than HELOCs or credit lines which come with a variable interest rate. But after years of declines, HELOC balances finally rose by $2 billion in the second quarter and the limits on those credit lines jumped by $18 billion, according to the Federal Reserve Bank of New York.
The credit bureau TransUnion measured a 41% jump in the number of HELOCs issued nationally in the second quarter — 291,736 vs. 207,422 a year earlier.
Another source of money
Mark Vitner, a senior economist with the Wells Fargo Economics Group, suspects that the renewed interest in home equity extraction could reflect the financial stress some households are coming under with inflation running at 40-year highs. Higher food and gasoline prices have forced more people to turn to credit cards, where the average interest rate is above 15% and rising.
“There is no measure that shows people who are rolling credit card debt into HELOCs, but it wouldn’t surprise me if we have seen an increase there. It is a better way to borrow money than ratcheting up credit card debt,” he said.
The typical Colorado household has had to spend about $7,522 more on living costs since 2020 due to higher inflation, estimates Chris Brown, vice president of policy research with the Common Sense Institute in Greenwood Village, in a recent research note. And while wages are also rising, they haven’t kept up with inflation, which was running 8.2% in July.
Many borrowers are sitting on mortgages made with rates at historic lows, so it doesn’t make sense to refinance the entire thing to cash out. Better to draw off a bit of equity as needed.
Another contributor is that there is plenty of equity to tap. Home buying activity surged when the Federal Reserve cut rates to rock bottom in 2020 to protect the economy from a pandemic shock. But that set off a home buying frenzy. From March 2020 to May 2022, metro Denver home prices are up 46%, according to the S&P Case-Shiller Home Price Index. Over the past seven years, they have doubled.
In the first quarter, U.S. homeowners gained an additional $3.2 trillion in home equity compared to the prior year, according to real estate research firm CoreLogic. In Colorado, the average homeowner gained $92,000 equity in the first quarter year-over-year, and in metro Denver, that gain was $97,300.
Besides coping with inflation or doing the usual things like paying for a renovation, it could be that some consumers tried to get ahead of rising interest rates to extract home equity at a lower cost this year. Others might have even tried to build up their financial reserves ahead of a recession and possible job losses. Colorado, for whatever reason, came out on top.
Is there a risk?
A concern with people using home equity to cover spending is that it could leave them vulnerable if home prices start to decline. During the housing boom in the ’00s, people used home equity to purchase additional homes and fund more lavish spending, so much so that homes became referred to as automated teller machines.
And when those ATMs stopped spitting out dollars, consumers found themselves overextended and the economy lost a source driving higher spending. The country didn’t just have a recession, but a “Great Recession.” But this time around, consumers are starting to draw more on their equity as the economy is slowing, which could ease the blow of any recession.
Home equity extraction could serve as a cushion against any downturn, rather than a major contributor to it.
Lou Barnes, a loan officer with Cherry Creek Mortgage in Boulder, said the volume of second home loans of any type in the U.S. crested in 2006 at $1.1 trillion. The first quarter volume was at $393 billion. Despite there being a whole lot more home equity to tap, consumers are much more cautious than they were in 2006. They aren’t out of control and are unlikely to lose control.
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“There is $27.8 trillion of home equity that Americans are sitting on. That is a ton of money,” adds Channel.
American homeowners have only tapped 1.4% of the equity available to them, making fears they are putting themselves and the larger housing market at risk premature and overblown.
“HELOCs are still falling into disuse and will struggle to grow at all in the next year or two,” Barnes predicted.
And borrowers aren’t showing a lot of stress right now when it comes to meeting their mortgage payments. About 4.7% of mortgages nationally were delinquent by 30 days or more in May 2021, but only 2.7% were this May, according to CoreLogic. That represented a 23-year low in terms of the share of people behind. In metro Denver, the delinquency rate fell from 2.9% to 1.6%.
