More homeowners are staying in their homes longer than ever before, locked into historically low mortgage rates and choosing not to move up to another home despite rising equity in their current home.
Instead of following the American ideal of staying in a home for a few years before upgrading to something better, more homeowners are choosing to stay put longer than ever before and are improving their homes instead, according to First American, which in October 2018 released a report showing that the median tenure for homeownership has jumped to 10 years, up 10 percent from 2017.
Just before the housing downturn in 2007, homeowners typically stayed in their home for four years. After the subsequent housing crash, it was seven years, partly because many mortgages were underwater.
Rising home prices have given many homeowners enough equity to sell their homes at a profit, but low interest rates have created a “rate lock-in effect” that keeps homeowners put as rates rise, said Mark Fleming, chief economist for First American.
Mortgage rates have been increasing for the past year and are expected to continue to rise to an average of 5 percent in 2019, says Fleming. The last time a 30-year, fixed-rate mortgage was 5 percent was in 2009.
“Homeowners with mortgage rates below the current rate may be reluctant to give them up for a higher rate, a phenomenon known as the ‘rate lock-in effect,”” says Fleming. “There is less incentive to sell your home if borrowing the same amount from the bank at today’s rates will be more expensive than your existing mortgage payment.”
With higher equity in their homes, and locked into a low mortgage, more homeowners will choose to stay in their homes and update them with home equity lines of credit, or HELOCs, adds Fleming.
“I think that HELOC loan demand will increase. The higher mortgage rates go, the larger the financial penalty for moving, and the greater the incentive to renovate with a HELOC loan instead,” explains Fleming.
A HELOC is a second mortgage against your home that’s used like a credit card to borrow money as you wish. You only pay interest on the amount you withdraw.
A recent Open Listings survey found that if respondents had $10,000 to allocate toward housing, 73 percent would use it for current home renovations—and the rest would put it toward a down payment on their next home.
The number of HELOCs grew 2.3 percent to 1.2 million from 2016 to 2017, with an estimated 70 million homeowners likely qualifying for a home equity product, according to a recent TransUnion study.
This article is intended for informational purposes only and should not be construed as professional or legal advice.