HELOC balances jump by $23B, the biggest quarterly surge since 2005

Homeowners pulled $23 billion more out of their home equity lines of credit in the third quarter, the Federal Reserve Bank of New York said Tuesday in its household debt report. That's the biggest three-month increase since 2005 and the 18th quarter in a row that HELOC balances have climbed, lifting the total owed to $481 billion. It still sits well below the roughly $714 billion peak recorded in early 2009, according to a 2015 New York Fed report.

The draw makes sense in a housing market where moving is expensive. Just under half of outstanding mortgages — 49.1% — carried rates of 4% or lower in the second quarter, according to a Realtor.com analysis of federal mortgage data. The average 30-year fixed mortgage rate was 7.3% as of Tuesday, per Mortgage News Daily, while the median existing-home price hit $417,500 in September, the National Association of Realtors said — up 1.3% year over year and nearly 54% above September 2019.

There's plenty of equity to borrow against. Mortgage holders held $17.5 trillion in home equity in the third quarter, according to a report from financial markets data firm Intercontinental Exchange. Tappable equity — the amount left while keeping the homeowner at or above 20% equity — rose 1.2%, or $16,600, from a year earlier to an average of $204,000 per borrower. Andy Walden, ICE's head of mortgage and housing market research, noted that 2.4 million mortgage holders now have at least $1 million in equity.

Cheap to open isn't the same as cheap to carry. The average rate on a $30,000 HELOC was 7.49% as of Nov. 4, according to Bankrate, and unlike a fixed home equity loan, HELOC rates float with benchmarks tied to the Fed's moves. Certified financial planner Douglas Boneparth, president of Bone Fide Wealth and a CNBC Financial Advisor Council member, put it bluntly: if your budget only works at today's rate, then your budget doesn't really work.

Boneparth also flagged the payment cliff built into many HELOCs. After a five- or 10-year draw period of interest-only payments, borrowers enter a repayment stretch of 10 or 20 years covering both interest and principal. Payments potentially could double overnight, he said, and you really want to know that before you sign anything. He added that borrowing against a home to improve it can make sense, but using it to pay off credit cards is trickier — you're turning unsecured debt into debt secured by the roof over your head.