Personal Finance
Home equity is at a record high. Here’s how to tap it
Thanks to the runup in housing prices, homeowners now have more than $32 trillion in home equity as of the first quarter of 2024, according to the St. Louis Federal Reserve — an all-time high.
“It’s one of the very few things we can say about today’s housing market that is, more or less, positive,” said Jacob Channel, senior economic analyst at LendingTree.
While the average borrower sits on roughly $214,000 in equity that can be tapped, 60% of homeowners have at least $100,000, the Intercontinental Exchange’s Mortgage Monitor also found. Tappable equity is the amount most lenders will allow you to take out while still leaving 20% in the home as a cushion.
Rising home prices have “continued to build the fortunes of existing homeowners, pushing tappable equity to its highest level ever,” said Andy Walden, vice president of research and analysis at the Intercontinental Exchange.
How to tap your home for cash
Although homeowners are sitting on a record amount of housing wealth, the cost of borrowing against your home is also near the highest it’s been in recent years largely due to a series of rate hikes by the Federal Reserve, according to Greg McBride, chief financial analyst at Bankrate.com.
High interest rates makes access to home equity more challenging.
“There’s a long-held sense that it’s a cheap source of funds, but that paradigm has changed,” McBride said.
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In the aftermath of the pandemic, many existing homeowners refinanced their mortgage when interest rates hit rock bottom and pocketed the difference as a lump sum.
Currently, with mortgage rates around 6.3%, fewer homeowners are jumping at the chance to do a cash-out refinance.
“As rates come down, you might see more opportunities for a cash-out refi, but nobody is going to confuse it with 2021,” McBride said, referring to the period of “ultra-low” rates after the Fed slashed its benchmark to near zero.
And yet, some homeowners are already more willing to refinance now that mortgage rates are down from recent highs — as of the latest reading, mortgage refinance demand is more than 100% higher than a year ago.
Alternatively, a home equity loan is a type of second mortgage, which allows borrowers to pull cash while using the house as collateral. In this case, the loan comes as a lump sum with a fixed rate.
“A home equity loan could be a good option for homeowners who want to raise money to pay for renovations, either to make the home more to their liking, or to fix it up before selling the home next year,” said Holden Lewis, home and mortgage expert at NerdWallet.
However, the current average home equity loan interest rate is 8.52%, according to Bankrate, notably higher than a 30-year fixed-rate mortgage.
In this case, as well, “elevated rates have contributed to homeowners’ reluctance to take out fixed-rate home equity loans,” Lewis said, “but some of that trepidation will melt as rates drop.”
Otherwise, a home equity line of credit, also known as a HELOC, lets you borrow money against a portion of your home’s equity. Instead of taking out a home loan at a fixed amount, a HELOC is a revolving line of credit — but with better rates than a credit card — that you can use when you want to or just have on hand.
The average HELOC interest rate is just shy of 10%, according to Bankrate. While those rates are high compared with the typical mortgage or home loan, they are significantly lower than what it costs to borrow on credit cards, which charge more than 20%, on average.
Factor in the terms, rates and risks
Of course, different lenders will also offer different terms and interest rates, according to LendingTree’s Channel.
Channel recommends talking to several mortgage companies or loan officers, as well as weighing all of the costs before deciding what course of action makes the most sense.
When it comes to borrowing against your home, the rate and terms of a loan are not the only considerations, he added. There are also risks associated with tapping your home for cash.
“Defaulting on a home equity loan can have serious negative consequences,” Channel said.
Chief among them is that failure to pay back a home equity loan can result in foreclosure, he said. Even if it doesn’t, it can still ruin your credit and otherwise make it much harder for you to get approved for another loan — regardless of the type.
“The best piece of advice is to be thorough and to plan ahead,” Channel said. “Make sure you are in position that whatever you borrow, you will be able to pay back. This isn’t one of those things you should try to wing.”
Former President Donald Trump and Vice President Kamala Harris are shown on screen during a debate watch party at the Cameo Art House Theatre in Fayetteville, North Carolina, Sept. 10, 2024.
Allison Joyce | Bloomberg | Getty Images
With the Social Security Administration facing a looming funding crisis over the next decade, it’s clear that the next U.S. president — either Democratic candidate Kamala Harris or Republican candidate Donald Trump — is poised to inherit a Social Security dilemma.
Almost 68 million Americans receive Social Security payments every month. The benefits support seniors in their retirement, disabled Americans and survivors of beneficiaries, but the future of the Social Security Administration has been in jeopardy for years.
More than 11,200 Americans are now turning 65 every day. As more retirees start to claim Social Security, there are not enough workers contributing to the program to make up for that increase in benefit payments.
When such a shortfall happens, Social Security turns to its trust funds — money that is set aside to help pay for benefits and other administrative costs.
But the trust fund Social Security relies on to pay retirement benefits is projected to be depleted in 2033. At that time, just 79% of benefits may be payable, according to the program’s trustees.
The average retired worker would see about a $403 cut to their current average monthly benefit of $1,920.
Most Americans rank Social Security as “one of the top” or a “very important” issue that will help determine how they vote in November, a recent CNBC poll found.
Both presidential candidates — former president Trump and Vice President Harris — have vowed to protect Social Security benefits.
But restoring the program’s solvency will require changes — benefit cuts, tax increases or a combination of both. Yet some experts say the candidates’ discussions have thus far avoided specific details on how to address that shortfall.
“We’re not seeing anyone step up and say, ‘In nine years, our main retirement program is looking at the trust of being insolvent, and that could lead to roughly a 20% benefit cut across the board of everybody,” said Jason Fichtner, chief economist at the Bipartisan Policy Center and executive director of the Alliance for Lifetime Income’s Retirement Income Institute.
Trump promises no taxes on Social Security benefits
Republican presidential nominee and former U.S. President Donald Trump speaks during a rally in Coachella, California, U.S., October 12, 2024.
Mike Blake | Reuters
On the campaign trail, Trump has touted an idea aimed at letting retirees keep more of their Social Security checks — ending taxes on benefits.
“Seniors should not pay tax on Social Security,” Trump wrote on July 31 in all capital letters on social media platform Truth Social.
A recent ABC News/Ipsos poll found 85% of voters support the idea.
Currently, retirees pay federal income taxes on up to 85% of their benefits, depending on their incomes.
Just how much taxes retirees pay on benefits is based on a formula called combined income, the sum of adjusted gross income, nontaxable interest and half of Social Security benefits.
Married couples may pay taxes on up to 50% of their benefits if their combined incomes are between $32,000 and $44,000. If their incomes are over $44,000, up to 85% of their benefits may be taxable.
Individuals may be liable for taxes on up to 50% of their benefits if their incomes are between $25,000 and $34,000. If they have more than $34,000 in income, up to 85% of their benefits are taxable.
Because those thresholds do not change from year to year, more beneficiaries are paying taxes on their benefit income over time.
Ending taxes on Social Security benefits would move the insolvency date of Social Security’s trust fund closer by over one year, according to the Committee for a Responsible Federal Budget.
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And it may not make a big difference in retirees’ budgets, according to Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center.
The median household income for retirees is about $50,000, so the “vast majority” pay very little or nothing in taxes on their Social Security benefits, Gleckman said.
Exempting taxes on benefits would mostly help those with incomes between $63,000 and $200,000, the Urban-Brookings Tax Policy Center’s research found.
But while the top 20% of households would see an average tax cut of about $1,400 after the elimination of the taxes on Social Security benefits, Gleckman explained, they would see an average tax increase of $6,500 with Trump’s plans to impose tariffs on imports.
“The net effect of what Trump is trying to do, if you look at everything including the tariffs, is probably increased taxes on retirees, even if they do get some benefit from repealing the tax on Social Security benefits,” Gleckman said.
The Trump campaign did not respond to a request for comment by press time.
Harris wants ‘wealthiest Americans’ to ‘pay their fair share’
Democratic presidential nominee U.S. Vice President Kamala Harris looks on as she participates a “town hall” with radio host Charlamagne Tha God, in Detroit, Michigan, U.S., October 15, 2024.
Kevin Lamarque | Reuters
The Harris campaign’s economic plan promises to “shore up Social Security and Medicare so that these essential programs will stay solvent in the long run by making corporations and the wealthiest Americans pay their fair share in taxes.”
In budget proposals and during the State of the Union, President Joe Biden has likewise called for having high earners pay more into the program.
More specific details on how Democratic candidate Harris would restore solvency to the program as president were not available by press time.
Employers and employees each pay 6.2% of wages to Social Security up to a taxable maximum (self-employed individuals pay 12.4%). In 2024, the limit on earnings that are subject to the Social Security payroll tax is $168,600. Top earners with $1 million in gross annual wage income stopped paying into the program as of March 2, according to the Center for Economic and Policy Research.
Washington Democrats have proposed reapplying those taxes for earnings over $400,000 or $250,000 in separate proposals, while also potentially raising taxes on investment income. Those tax increases would improve the program’s solvency, while also making certain benefit increases possible, per the proposals.
If Harris holds to the $400,000 threshold set by the Biden administration, her Social Security proposal would have “no impact on the vast majority of households,” according to Gleckman, since around 95% to 98% of households make that amount or less.
“Vice President Harris and Governor Walz are fighting to lower costs and will always protect and strengthen Social Security and Medicare,” campaign spokeswoman Mia Ehrenberg said in a statement.
Older Americans may feel effects of reform
As Social Security’s depletion dates get closer, any reform changes would need to phase in more quickly.
And people ages 55 and over — who are typically left out of Social Security reform proposals such as raising the retirement age — may also feel the effects of any changes, according to Fichtner.
“You don’t have a lot of time to change your retirement trajectory once you hit 55,” Fichtner said. “But now that we’re getting so close to trust fund depletion … and the magnitude is so large, I’m not sure we can actually afford from a financial standpoint to hold them harmless.”
Regardless of who is elected, it remains to be seen how much a new president can accomplish on Social Security.
With 60 votes required in the Senate to pass Social Security reform, both parties would have to agree.
Experts say it is possible lawmakers may wait until the last minute to address the issue.
“As you get closer and closer to the insolvency date, it means the benefit reductions have to be steeper and quicker, and it means the tax increases have to be more significant and faster,” Gleckman said. “So it makes it even harder.”
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