With the Federal Reserve lowering rates by 50 basis points and signaling more on the horizon, excitement over the coming wave of refinances overshadows the big opportunity in front of mortgage originators in the here and now: home equity lines of credit (HELOC). There’s a reason that originators should keep an eye on this potential market.
The surge in HELOC balance in the past few years presents an important chance to connect with homeowners who need cash — for home improvement, debt consolidation or otherwise — but dread disrupting their sub-4% mortgage interest rate. This is even more important with the rapid rise in home equity recently.
Lenders should find ways to connect with these individuals and educate them on what millions of Americans have recently recognized. HELOCs give homeowners with tappable equity a practical way to access cash at a relatively lower rate without compromising their low-rate mortgages.
Unique circumstances
HELOC balances had been on a gradual decline since the 2008 financial crisis. That trend turned around in early 2022, with nationwide HELOC balances growing by 20%. On the surface, this is surprising because HELOC rates have shot up over that same period. Currently, the average HELOC rate sits just under 10%.
Why aren’t rising HELOC rates driving HELOC demand down? Several unique circumstances are at play here. Americans are carrying record-high levels of debt. Credit card debt, already at all-time highs, increased by $27 billion (5.8%) in the second quarter of 2024 to $1.14 trillion nationwide, according to the Fed. Credit card interest rates have also soared in the past few years, meaning all that credit card debt carries an average interest rate of 21.5%. That makes a 9.5% HELOC a no-brainer for debt consolidation.
As of early 2024, almost nine in 10 U.S. homeowners had a mortgage rate below 6%, according to Redfin. Tens of millions of homeowners feel “stuck” in their homes with these low-rate mortgages. People who would normally “trade up” — buying a new home with more space or additional amenities — are now looking for ways to make the home they’re in into the “new” home they want or need.
The average U.S. homeowner has nearly $300,000 in home equity with over $200,000 of tappable equity. Strong appreciation in home prices and values over the past few years has accelerated this growth in home equity, and HELOCs let homeowners tap into this cache without selling their homes. Home equity represents a strategic way for homeowners to access cash, whether for debt consolidation, home improvements or other purposes.
Smarter option
Traditionally, homeowners have opted for cash-out refinances to access all (or more) of that cash, typically at a lower rate than a HELOC can offer. With mortgage rates still relatively high, HELOCs provide a less painful option — a smarter way to liquefy the equity in their home without losing their low-interest mortgage.
In other words, HELOCs let homeowners pay a higher interest rate only on the cash they extract rather than bumping their entire outstanding mortgage balance up to a higher rate. The undercurrent of rising HELOC demand hits at an ideal moment for mortgage originators who are eagerly awaiting the Fed’s rate cuts.
Falling Fed rates will undoubtedly bring a wave of refis (from basically every homeowner that bought in the past two years). Lenders are also hopeful that falling rates will jolt the sluggish purchase market. Yet the reality is that the refi wave may take some time to build after the Fed starts cutting. And it will be a while before rates fall far enough to find the majority of homeowners willing to overcome the lock-in effect.
HELOCs give originators a prime opportunity to re-engage with existing clients who won’t be in the purchase market anytime soon — and who are not recent homebuyers that will join the refi wave. In fact, the HELOC surge will overlap with the start of the refi wave; at least until refi rates fall far enough to compare favorably to the 3-4% rates of many homeowners with more significant equity in their homes. Just as with a refi wave, mortgage lenders need to get ahead of the demand by engaging with clients before they go out rate-shopping.
Life milestones
It’s not always clear to lenders which homeowners have a significant amount of equity in their database. By taking data silos and uniting them with an action system, lenders and the originators who work with them can establish better transparency through continuously enriched client profiles that detail home equity without manual equity reporting.
Then lenders can quickly identify homeowners above certain equity levels to create hyper-personalized messages and engage them at the right time. Once you do this, use life milestones to hone your list. Tappable equity points you to the right people, but key life milestones help you narrow in on those in-market (or soon-to-be in-market) prospects.
Starting or expanding a family often triggers a need for more room. Getting married can lead to concerted efforts to consolidate debt. Switching careers might cause an adjusted income or spur the need to create a work-from-home space. And retirement often corresponds with both home improvement projects and debt consolidation. Lenders need to use their first- and third-party data signals to anticipate those life milestones and engage at the right time.
Consumers today are allergic to the hard sales pitch; they want to feel in control and empowered to shop around and make smart decisions on their own. While they can easily shop rates on their own, what they crave is helpful education and trusted guidance.
Moreover, HELOCs can be complex products, making them a great opportunity to provide this kind of guidance. Educate clients on how HELOCs work and their relative benefits and risks. Earning their trust is the best inroad to closing the deal — and, perhaps even more importantly, trust plants the seed to grow loyal clients for life.
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With the Fed cuts having arrived, mortgage lenders are preparing to capture the looming refi wave. But it would be foolish to ignore the sharply rising demand for HELOCs — because that opportunity is tangible now and will likely exist alongside the promised refi wave when it finally does hit. Unlike the refi wave (in which recent homebuyers fully understand their opportunity and are waiting to take advantage), lenders have a unique chance to educate a large segment of homeowners with tappable equity about why this is the perfect time to consider a HELOC. Lenders that can identify the right consumers and engage them with this kind of educational content will see their efforts rewarded through both short-term HELOC revenue and the multiplying value of lifetime loyalty.
