More Americans are unlocking home equity lines of credit

Americans who want to tap the rising equity of their homes without giving up their low mortgage rates are increasingly turning to home equity lines of credit.

After almost 13 years of declines, balances on home equity lines of credit, known as HELOCs, have begun to rebound, gaining 20% since bottoming out at the end of 2021, according to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit released Tuesday.

Meanwhile, high borrowing costs led to fewer mortgage originations in the second quarter.

The share of overall consumer debt in delinquency was unchanged at 3.2%, though the share of auto and credit card loans that were newly delinquent continued to climb, the report also showed.

Some $374 billion in mortgage debt was originated in the second quarter, down substantially from about $900 billion on average in 2021 and 2022, the report said. Balances on home equity lines of credit, or HELOCs, rose to $380 billion, representing the ninth consecutive increase.

“The volume of mortgage originations remained low, primarily due to subdued refinancing activity,” Andrew Haughwout, director of household and public policy research at the New York Fed, said in a press release accompanying the report. “Homeowners continued to increase HELOC balances as an alternative way to extract home equity.”

The drop in mortgage origination is part of a broader slowdown in a housing market that became overheated during the pandemic, when home buyers and home owners rushed to take advantage of lower mortgage rates by purchasing homes and refinancing existing loans.

Since late 2021, HELOC balances have rebounded as people use this source of cash to pay down other debt or meet large expenses. Around 1.8 million HELOCs in total were originated in 2023 and the first two quarters of 2024, and many went to older borrowers, who typically have owned their homes for a longer period of time and have more equity to tap.

Overall household debt increased by $109 billion in the second quarter to $17.8 trillion, the report showed. That included a $77 billion increase in mortgage debt, which was slowed by the drop in mortgage originations. Balances on credit cards rose by $27 billion to $1.14 trillion, and auto loan balances increased by $10 billion to $1.63 trillion. 

Consumers continued to struggle with their debt payments despite the stablization in overall delinquency. The share of auto loan balances that became at least 30 days delinquent rose to 7.95%, the most since 2010. The share of credit card debt that was newly delinquent rose to 9.05%, the most in about 12 years.

Meanwhile more than 10% of the youngest credit card borrowers had not made a payment in at least 90 days as of the end of June, double the rate at the end of 2021.

Copyright Bloomberg News