Colorado homeowners are pushing hard on home equity loans


Colorado homeowners tapping into 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, senior economist at LendingTree, who studied how much people borrow against their home equity on its online lending platform. Nowhere do they snack more than in Colorado.

It’s rare to see home loans over $150,000 or even $100,000 and the US 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 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 in behind mortgages for repayment after default, carry higher risk for lenders and a higher interest rate to compensate. And this rate can vary depending on the location, more so than for mortgages. LendingTree found that home equity loans issued this year had an average interest rate of 8.47% in Alaska, while in Maryland, the cheapest 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 warned that the rate includes loans made earlier in the year when borrowing costs were high. much lower. Today, someone who borrows against their home equity should expect to pay more.

LendingTree only studied home equity loans, which carry a fixed rate, rather than HELOCs or lines of credit which come with a variable interest rate. But after years of declines, HELOC balances finally rose by $2 billion in the second quarter and limits on those lines of credit jumped by $18 billion, according to the Federal Reserve Bank of New York.

Credit bureau TransUnion measured a 41% increase in the number of HELOCs issued nationwide in the second quarter – 291,736 from 207,422 a year earlier.

another source of money

Wells Fargo Economics Group senior economist Mark Vitner suspects the renewed interest in home equity extraction may reflect the financial stress some households are facing with inflation hitting 40-year highs. Rising food and gas prices have forced more people to turn to credit cards, where the average interest rate is over 15% and rising.

“There’s no metric that shows people rolling credit card debt into HELOCs, but it wouldn’t surprise me if we saw an increase there. It’s a better way to borrow money. money than increasing credit card debt,” he said.

The typical Colorado household has had to spend about $7,522 more on the cost of living since 2020 due to rising inflation, estimates Chris Brown, vice president of policy research at the Common Sense Institute of Greenwood Village, in a recent research note. And while salaries are also increasing, they have not kept up with inflation, which was current 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 whole thing to cash out. Better to raise some equity if needed.

Another contributor is that there is a lot of equity to exploit. Home buying activity surged as the Federal Reserve cut rates to 2020 lows to shield the economy from a pandemic shock. But it sparked a home-buying frenzy. March 2020 through May 2022, Denver Metro house prices have increased by 46%, according to the S&P Case-Shiller home price index. Over the past seven years, they have doubled.

In the first quarter, US owners gained a Additional $3.2 trillion in real estate capital compared to the previous year, according to real estate research firm CoreLogic. In Colorado, the average homeowner gained $92,000 in equity in the first quarter year over year, and in the Denver metro area, that gain was $97,300.

In addition to coping with inflation or doing the usual things like paying for renovations, it could be that some consumers have been trying to anticipate rising interest rates to extract equity from their property more cheaply. This year. Others are said to have even tried to build up their financial reserves ahead of a recession and possible job losses. Colorado, for some reason, came out on top.

Is there a risk ?

People who use their home equity to cover expenses worry that it will leave them vulnerable if home prices start to fall. During the housing boom of the 2000s, people used their home equity to buy additional homes and fund more lavish spending, so much so that homes became ATMs.

And when those ATMs stopped spitting out dollars, consumers found themselves overwhelmed and the economy lost a source leading to increased spending. The country has not only experienced a recession, but a “great recession”. But this time around, consumers are starting to dip more into their capital as the economy slows, which could soften the blow of a recession.

Home equity extraction could serve as a cushion against any downturn, rather than a major contributor to it.

Lou Barnes, loan officer at Cherry Creek Mortgage in Boulder, said the volume of secondary home loans of all types in the United States peaked in 2006 at $1.1 trillion. The first quarter volume was $393 billion. Although there is a lot more equity to tap into, consumers are much more cautious than they were in 2006. They are not out of control and they are unlikely to lose control.

“There is $27.8 trillion in equity that Americans are sitting on. It’s a ton of money,” adds Channel.

US homeowners have tapped just 1.4% of the net worth available to them, making fears they are putting themselves and the broader housing market at risk premature and overblown.

“HELOCs are still falling out of favor and will struggle to grow over the next couple of years,” Barnes predicted.

And borrowers aren’t showing much stress right now when it comes to meeting their mortgage payments. About 4.7% of mortgages nationwide were 30 days or more past due in May 2021, but only 2.7% were past due in May, according to CoreLogic. This represented a 23-year low in terms of the share of people behind. In the Denver metro area, the delinquency rate fell from 2.9% to 1.6%.

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