More than 80% of U.S. homeowners with a mortgage had “tappable” equity in their homes as of the end of the third quarter, according to Black Knight’s Mortgage Monitor.
However, because interest on home equity lines of credit (HELOCs) is no longer deductible under the recently passed tax reform plan, it’s possible that fewer homeowners will be inclined to tap into that equity, according to the report.
“HELOCs have been an attractive option for borrowers to utilize available equity without sacrificing low first-lien interest rates,” Black Knight says in the report. “With interest on these products no longer deductible, the value proposition has changed.”
As of the end of the third quarter, the approximately 42 million homeowners with a mortgage had nearly $5.4 trillion in equity available to borrow against, assuming a maximum 80% total loan-to-value ratio, according to the report.
Ben Graboske, executive vice president for Black Knight Data and Analytics, says that’s “an all-time high.” He says total equity is up more than $3 trillion since the bottom of the market in 2012.
Driving that, of course, is rising home prices.
Whether the change in the tax code results in fewer homeowners tapping into their equity remains to be seen. Graboske says it could make cash-out refinances more attractive for certain borrowers, but it could also make HELOCs more attractive for others.
“We’ve noted in the past that as interest rates rise from historic lows, HELOCs represented an increasingly attractive option for these homeowners to access their available equity without relinquishing interest rates below today’s prevailing rate on their first-lien mortgages,” Graboske says. “However, with the recently passed tax reform package, interest on these lines of credit will no longer be deductible, which increases the post-tax expense of HELOCs for those who itemize.
“While there are obviously multiple factors to consider when identifying which method of equity extraction makes more financial sense for a given borrower, in many cases, for those with high unpaid principal balances who are taking out lower line amounts, the math still favors HELOCs,” he adds. “However – assuming interest on cash-out refinances remains deductible – for low-to-moderate UPB borrowers taking out larger amounts of equity, the post-tax math for those who will still itemize under the increased standard deduction may now favor cash-out refinances instead, even if the result is a slight increase to first-lien interest rates.”