- Reuters/Toby Melville
The surge in home values in California is prompting a growing number of homeowners to treat their properties like piggy banks and draw cash out of their homes.
They are using the equity on their homes to access credit products that take advantage of the higher value, according to a September report from the California Credit Union League.
For instance, the league observed a rise in the number of people getting Home Equity Lines of Credit (HELOCs) – an extra credit line that uses the homeowner’s property as collateral in case they are unable to pay.
The league also observed a rise in cash-out refinance mortgages. That’s essentially a second mortgage that’s larger than the existing mortgage on the house, pays it off, and lets the homeowner keep the change. That cash is not free, however, as the borrower would need to pay interest on it.
The California Credit Union League is a trade association for credit unions in that state, and with the Nevada Credit Union League, it serves more than $148 billion in assets.
During the second quarter, the league found that first mortgages, which include cash-out refinances, rose by 13% to a record outstanding dollar amount of $53.2 billion. At the worst levels during the recession, it hit a post-recession low of $35 billion.
Combined, HELOCs and home equity loans (second-mortgages) outstanding rose 5%to over $10 billion. That’s up from a low of $9 billion in 2013 but down from $14 billion in 2008.
Dwight Johnston, chief economist of the California Credit Union League, said homeowners are tapping the equity on their homes mostly to raise cash for remodeling and feature upgrades. But people usually pull cash out of their homes for any number of reasons, from paying for college to funding emergency medical expenses.
Additionally, mortgage interest can be tax deductible, making it more appealing than other ways of accessing credit.
Regardless, this rise is one way homeowners are cashing in on the housing boom in the state.
Home prices in California and nationally have surged since the financial crisis amid strong demand from first-time buyers and people looking to upgrade their homes. That pace of appreciation recently slowed sales in cities like San Francisco, as buyers became more cautious.