Why aren’t more homeowners using equity for renovations?

by Kimberly Greene10 Jul 2019

More than half of homeowners are planning to make upgrades to their homes this year, according to a recent survey by Discover Home Loans. Nearly 44 million homeowners with mortgages now have more than 20% equity in their home, according to the May 2019 Mortgage Monitor Report from Black Knight, and tappable equity is expected to surpass last summer’s all-time high of $6.06 trillion.

In spite of these two facts, the Discover Home Equity Loans survey revealed that just 38% of homeowners are planning on leveraging the equity that they have in their homes—and of the homeowners who have an estimate of their home’s worth, almost half believe that equity is more than $100,000. Of that 38% who are planning on leveraging that equity, 34% respondents said that they’d prefer to use cash for their projects, and 23% said that they planned on paying for their planned renovations with a credit card.

There are obviously pros and cons to the various ways to pay for home renovations, but given the amount of equity that many homeowners have in their homes, why wouldn’t more people look into using their home equity to fund renovation projects?

The answer could be an adaptability issue.

Sathi Roy is the head of refinance at Better.com, and she says that people don’t understand that a mortgage is something that can change over time, depending on what people need at a given point in their life cycle.

Refinancing is something that borrowers can do over and over again, and Roy doesn’t think that people know that yet. They’re trying change the narrative and the prevailing idea that the mortgage someone has now will be the same mortgage that they have in 20 year, and depending on your life circumstances, a mortgage can adapt as well.

“Refinancing is something that you can do at a million points and I don’t think that people know that yet,” Roy said. “I don’t think that people necessarily think cash is better or credit cards are better, I just think that they don’t have the right resources telling them what the pros and cons are, and why the refi option is much, much more advantageous than doing a super high interest credit card or a really high interest rate personal loan.”

Rate and term refinances are still plenty popular, Roy says, especially as interest rate are still as low as they are. But for renovations, people tend to think that home equity loans and HELOCs are the way to go. Borrowers don’t always think about the fact that a HELOC offers attractively low rates, but that the rate is adjustable; which could end up forcing a refinance down the road anyway.

The fact that so many people are planning renovations on credit cards could be troubling, given the high interest rates that companies charge. Depending on the scale of the projects, homebuyers could end up paying much more than the actual renovation costs. Credit cards are a familiar option, though, and they don’t require anything additional from the borrower.

“Mortgages haven’t advertised themselves in the same way that credit card companies have, and I think that’s where we need to start to go. Credit card companies have done a great job of aligning themselves with people’s daily needs and daily transactions. With mortgages, people think of it as a one-time-in-10-years [thing], so it’s not something that people would think about maybe every two years, every three years, depending on where their life is.”

Borrowers come into the overall mortgage process with varying degrees of financial literacy, and they’re often unaware that refinancing a mortgage doesn’t always have to have anything to do with a change in interest rates. A mortgage doesn’t have to stay the same; it can change based on either market sources or personal circumstances, and borrowers aren’t always aware of how it can be leveraged to help them achieve their overall financial goals.

The refinance side of the business is booming right now, and Roy says that even people who have bought homes within the past couple of years are coming back to take advantage of the current rate environment. It’s a great time for both straight rate and term refinances as well as cash-out refinances for people looking to use the money for debt consolidation and the like.

Cash-out refinance withdrawals fell from $27.9B in Q4 to $27.3B in Q1 2019, according to the Black Knight Report, although “early indications suggest cash-out withdrawals are up in Q2 2019 as lower rates provide refinance incentive and reduce the long-term expense of tapping equity,” it reads. HELOC lending, on the other hand, fell both quarter-over-quarter and year-over-year, and HELOC equity withdrawals fell below cash-out equity refis for the first time in more than eight years.

Ultimately, property is just one more thing that borrowers can leverage to improve their lives, if they are able to reframe the way they think about mortgages. Originators can help with that reframing, although it can be somewhat of a challenge. Roy likens it to that symbol from childhood where personal finance lessons began for many people.

“Your house is essentially a piggy bank. People don’t really think about it in that sense, she said. “Doing a cash-out refinance, you are doing a really risk-free option because you’re avoiding the adjustable rates for a lot of circumstances, you’re avoiding the hassle of going back and forth with builders and lenders for a construction loan, you’re avoiding the really high rates from personal credit card or personal loans, and you’re really just looking at the roof over your head, which is always going to be there, and that’s something that’s much more stable than a lot of these other options out there.”