The average mortgage holder has a record $185,000 in equity. What to know if you’re tempted to borrow from that

Record increases in home prices are pushing up the amount of equity people have in their homes.

Many Americans can borrow more against their biggest asset.

Financial experts caution against making such a move.

According to Black Knight, the average mortgage holder has about $185,000 in home equity, which is the amount they can access while still retaining a 20% stake.

Personal Finance explains what it takes to buy a first home in today's market.

Black Knight says homeowner equity is now over $9 trillion. The largest annual increase on record was achieved in 2021, with a 35% gain worth $2.6 trillion.

The hot market has made it an attractive time to sell. It can be difficult for people to relocate due to rising prices and rents.

Many homeowners have decided to take money from their homes in three different ways. Cash out refinancing, home equity lines of credit, or HELOCs, and reverse mortgages are some of the home equity conversion mortgages.

The Urban Institute found that more homeowners, particularly those over the age of 62, have been eager to extract equity from their homes. The number of loans to seniors went up to 759,000 in 2020.

Cash out refinances are where a new, larger mortgage replaces the old one. According to the Urban Institute, the median loan for those transactions was $200,000 in 2020.

As the Federal Reserve raises interest rates, that may increase the incentive for homeowners to make these transactions now.

The principal research associate at the Housing Finance Policy Center at the Urban Institute said that people could use more second liens if interest rates rise.

As rates rise, it's not going to be economical for most of them to refi.

Just because you have home equity doesn’t mean you can borrow from it.

He said that the market may shift from being mostly cash out refinance transactions to more home equity loans in the future.

Many consumers will not be able to afford a cash out refinance as their payments will likely go up. A home equity line of credit is a better option for someone who is remodeling their bathroom and only needs $25,000. The underlying principal on that loan is much lower than the interest rate suggests.

It is an individualized, personalized calculation that has to happen at the household level.

Greg McBride, chief financial analyst at Bankrate.com, said that it is important to remember that the lender will want you to maintain a 20% equity stake in your home.

This is not 2005, when you can pull out every last nickel of equity.

He said that home equity doesn't mean you can borrow from it.

The temptation is still great for people who want to pay down credit cards or fund home improvement projects.

Credit card rates are around 16%, while mortgage rates are 4%, according to Bankrate.

If you want to consolidate your credit card debts with a home equity loan, be careful. It can be helpful if the debt was the result of a single event, like a medical bill. If it is indicative of your lifestyle, you will still have a balance under your home equity loan.

If you haven't solved the problem of credit card debt, you're just moving around deck chairs on the Titanic.

Home improvement projects can be a reason to tap your home equity.

If I add another bedroom and a bathroom and a pool, the value of that is instantly higher than what you can buy for, not to mention the enjoyment that you will get along the way.

Some of the high-net-worth clients have pursued these transactions for home improvements, but they are not for everyone.

He said that you should be financially savvy and have the ability to take risks.

It is not possible to know when the bottom will be. He said that we may look back in five years and be envious of current interest rates.