More Americans are taking out home equity loans

More people are taking out home equity lines of credit these days. HELOC balances rose by $23 billion in the third quarter of this year, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed. That is the largest increase since 2005.

If you’re one of the millions of people who bought a home back when interest rates were around 2% or 3%, chances are you’re trying to hold onto that mortgage as long as you can.

That’s the infamous “lock-in” effect, explained Vanessa G. Perry, professor at the George Washington University School of Business and non-resident fellow at the Urban Institute's Housing Finance Policy Center.

“These folks who have accumulated equity are not moving, and so they may be investing in home improvements and using HELOC funds to do so,” she said.

HELOCs do tend to have a better interest rate than credit cards.

That’s one factor driving the increase in HELOC balances, per Chris Mayer, professor emeritus at Columbia Business School and CEO of Longbridge Financial. People with good credit scores and a lot of wealth tapping into their equity.

“The second is people who are really struggling with inflation,” Mayer said. “So the folks who are struggling to pay for filling up with gas, to pay for food and other expenses that they have,” there’s data showing they are also increasingly borrowing against their homes, he said.

It’s a trend, Mayer added, that is likely to continue.