Understanding the Rise of HELOCs in 2023: A Comprehensive Guide

One of the most significant financial assets for many homeowners is the equity in their homes. Since 2020, residential real estate has appreciated by a staggering $15 trillion, reaching over $58 trillion, according to the Federal Reserve. This increase in home values, coupled with homeowners diligently paying down their mortgages, has led to a substantial accumulation of home equity.

As the cost of living continues to fluctuate, with prices for big-ticket items like new cars, insurance premiums, and renovation costs climbing nearly as fast as home prices, many homeowners are leveraging their home equity through home equity lines of credit (HELOCs). By borrowing against the value of their homes, homeowners can finance home improvements, consolidate debt, or pay off higher-interest debts. In 2023, the average HELOC balance grew by 2.7% to $42,139, with more than $20 billion added to the total HELOC debt across all U.S. consumers.

Total HELOC Balances Increased 6.6% in 2023

Nationwide, HELOC debt increased by 6.6% in 2023, marking the second consecutive year of growth in HELOC balances. This trend reflects a shift from the 2010s when mortgage refinancing rates were between 3% to 4% APR, and homeowners preferred to refinance their existing mortgages with larger loans at lower interest rates. However, with current mortgage rates ranging between 6% to 7%, more homeowners are now turning to HELOCs to leverage their home equity.

What You’ll Need for a HELOC (Besides Equity)

A HELOC is a line of credit secured by the equity a homeowner has in their property. Lenders typically allow homeowners to tap up to a certain percentage of the paid-off portion of their mortgage. For instance, a homeowner with a property valued at $400,000 and $100,000 remaining on their mortgage may be able to access up to 80% of that equity, or $240,000, through a HELOC.

Most homeowners do not borrow the full amount they are eligible for. Across the U.S., average HELOC limits range from $75,000 to $175,000, but homeowners usually borrow about one-third of their HELOC limit, an amount that mirrors the cost of major home renovations. Additionally, many homeowners keep their HELOCs in place for future financing needs, even if they have a $0 balance.

To qualify for a HELOC, borrowers need to meet certain requirements. Lenders will assess the borrower’s income to ensure it can cover existing debts, including any HELOC borrowings. This is determined by calculating the borrower’s debt-to-income ratio (DTI), which most lenders prefer to be under 43%. Credit history and credit score are also important factors in the approval process.

HELOC Credit Limits Are Up in 2023

In 2023, the average credit limit for HELOCs was $117,598, a 1.7% increase from 2022’s average limit of $115,650. With the average HELOC balance at $42,139, homeowners are collectively using about 36% of their lines of credit. Credit limits vary significantly by state, with higher limits in states like California and Hawaii compared to lower-limit states like Indiana and West Virginia, reflecting the differences in average home prices.

Younger Homeowners More Likely to Be Tapping Home Equity

Homeowners born in 1965 or later have higher average HELOC balances than baby boomers or the Silent Generation, whose balances have decreased since 2022. This trend can be attributed to younger homeowners building families and updating their homes, while older homeowners may be considering alternatives like reverse mortgages, which are available to those aged 62 or older who have paid off most or all of their mortgage.

According to Susan Allen, senior vice president of mortgage at Experian, HELOC usage has increased among recent borrowers. “We are seeing HELOC line utilization, the amount drawn against the open line, increasing over the last 12 months,” Allen says. “Interestingly, 80% of consumers who originated their HELOC in the last two years have drawn on their lines, compared with only 62% of consumers with older HELOCs.”

HELOC Balances Climb in Most States

In 2023, average outstanding HELOC balances increased in 45 states and the District of Columbia. States like South Dakota, South Carolina, and Hawaii saw significant increases in HELOC balances, while states like California, Illinois, and New York experienced declines. This trend highlights the varying housing markets and economic conditions across the country.

HELOCs in 2024: Almost Ready for Prime Time?

As consumer demand for credit continues to grow in 2024, mortgage lenders are investing heavily in streamlining the HELOC application process. Innovations such as AI-powered property valuations and consumer-permissioned income and employment verification are making the process more efficient. However, due to the larger loan amounts and lien recording involved, borrowers may need to be more patient compared to smaller-sized unsecured loans. In return, they can benefit from significantly lower loan rates.

Once a HELOC is issued, homeowners should be intentional about their utilization, especially as home prices continue to appreciate at historic rates. “Nobody can predict when prices will level off,” Allen says. “So it is important to not assume that historical price increases will continue indefinitely.”

At O1ne Mortgage, we understand the importance of making informed financial decisions. If you’re considering a HELOC or need any mortgage services, our team of experts is here to help. Call us at 213-732-3074 to discuss your options and find the best solution for your needs. Let us help you leverage your home equity to achieve your financial goals.

For more information and to stay updated on the latest trends in the home financing market, visit our website and explore our range of mortgage services. At O1ne Mortgage, we’re committed to helping you make the most of your home equity.