Mortgage Lending at a Three-Year Low, But HELOCs Are Up

Mortgage originations took a dive in the third quarter, according to data from ATTOM, a curator of nationwide real estate data. Spiking mortgage rates have cooled buyer excitement, which drove unprecedented price growth in 2021. Refinance enthusiasm has also cooled significantly. However, home equity line of credit (HELOC) originations have steadily grown over the past five quarters.

Spiking Mortgage Rates Are Cooling the Housing Market

The U.S. housing market was blistering hot in 2021, leading to a staggering 18.8% increase in home prices for the year.

But as inflation rates increased suddenly, so did mortgage rates. According to Freddie Mac, the average rate for a 30-year fixed mortgage sits at 6.61%, more than double the 3.10% average from a year ago.

The result is a sudden about-face by homebuyers and homeowners. According to ATTOM, 1.97 million mortgages secured by residential properties between one and four units were originated in the third quarter of 2022. That figure is down 19% from the second quarter of 2022 and 47% from the third quarter of 2021—the largest annual drop since 2001.

ATTOM data also show that home prices are finally starting to cool, as the median amount borrowed to finance the purchase of a home slumped to a three-year low, even while the median down payment also decreased.

Homeowners are also refinancing their mortgage loans at a much slower pace. Home lenders originated 660,767 refinance loans in the third quarter, down 31% from the second quarter of 2022 and nearly 68% from the same period last year. It's the lowest quarterly total since the first quarter of 2019.

Refinance activity is expected to continue to decline as long as mortgage rates remain high.

Homeowners Are Tapping Their Newfound Equity Through HELOCs

As home prices soared in 2021, so did homeowner equity. While it doesn't make sense to refinance a sub-4% mortgage loan with existing rates, homeowners aren't leaving their equity where it is.

Instead of utilizing a cash-out refinance, homeowners are increasingly turning to HELOCs, which have seen increased originations in five out of the last six quarters. Lenders originated 364,921 HELOCs in the third quarter, which is up more than 5% from the second quarter and nearly 48% from the same time last year.

The main benefit of a HELOC is interest-only payments while the loan is in its draw period, and borrowers only have to pay interest on the amount they take from their credit line. However, HELOCs typically have variable interest rates, which can fluctuate over time. As a result, it's important to shop around and compare HELOC rates before applying and to be prudent with your draws to avoid overextending yourself.