Usable Home Equity Has Exploded Higher


Tappable equity is the amount of home equity available for homeowners to withdraw via a cash-out refinance or a second mortgage. It is typically calculated as total home equity minus 20 percent of home value. The 20 percent figure is used as a collateral cushion to protect the lender. 

Tappable equity is a new term that I’ve been hearing more often nowadays given the robustness of the current housing market. Most homeowners like to guess how much their homes are valued. They look at online pricing estimates and get all pumped about what a neighborhood home sold for.

Despite the excitement generated by changing home prices, it’s really the home equity that counts the most.

Home equity is equal to the current estimated value of a house minus the mortgage. For more precision, you could calculate home equity by also subtracting the estimated selling costs, including commissions, taxes, and fees from the market value of your home.

Example Of Tappable Equity

Let’s say you own a $1 million home. If you have $400,000 in equity (60% LTV with a $600,000 mortgage), then your tappable equity is $200,000. $200,000 comes from $400,000 (home equity) – $200,000 (20% equity in your home).

With the $200,000 in tappable equity, you can take out a home equity line of credit (HELOC) or do a cash-out refinance to remodel, pay for your kid’s college tuition, or buy the latest Ferrari Spyder. Even if you blow all your tappable equity, you still have $200,000 left of home equity.

Here’s another example of tappable equity.

Let’s say you bought a home for $500,000 in 2019 with 20% down ($100,000 home equity, $400,000 mortgage, 80% LTV). Today, the home is worth $700,000 and $360,000 is left on your mortgage. You now have $340,000 in home equity ($700,000 – $360,000) and $200,000 in tappable equity. The $200,000 comes from subtracting $140,000 (20% equity in a $700,000 home) from $340,000 (home equity).

Now that you see this dynamic example of how tappable equity can grow, you might be wondering whether the 20 percent equity variable should be applied to the original purchase price or current market value of your home.

You can do either for your personal calculations. But if you want money from the bank, you will have to use the current market value of your home.

From the bank’s perspective, it wants to have a large enough equity buffer just in case the homeowner is unable to pay back its loan. Back during the global financial crisis, many lenders shut down HELOCs to protect their balance sheets.

In reality, the value of your home, home equity, and tappable equity are subjective. There’s probably up to a 15% +/- valuation difference to consider.

Huge Increase In Total Home Equity Since 2010

Tappable equity has increased dramatically with the total amount of equity that has grown since the global financial crisis. But since 2020, the growth in total home equity has grown even steeper. Here’s a great graph by The New York Times and The Federal Reserve.

Top 10 Metro Areas With The Most Tappable Equity

Below is data from research house, Black Knight that shows the top 10 metro areas (cities) with the most tappable equity. Number one is San Jose, California, with a whopping $775,000 in tappable equity as of 4Q2021.

I’m not sure how San Jose tappable equity can be so high since the median home price is about $1,500,000 according to Zillow. This would mean after spending $775,000, the average San Jose homeowner would still have about $300,000 in home equity. If this is the case, the San Jose market will be incredibly resilient to a housing downturn.

The second city with the most tappable equity is actually my home town of San Francisco with $622,000 as of 4Q2021. However, in terms of the change in tappable equity, San Francisco ranks only 4th. The median home price in San Francisco is anywhere between $1,600,000 – $1,900,000 depending on which real estate organization you believe.

So again, another extremely resilient city in case of a downturn. Back in 2008 – 2010, home prices in San Francisco only declined by about 15% at most. That’s not a lot compared to the tremendous rise for years prior.

Top 10 Cities With The Most Tappable Equity

Most Impressive Cities For Tappable Equity Growth

Out of this top 10 list, the most impressive cities with tappable equity are Boise City, Austin, and Sarasota. The reason why is because for all three cities, the percentage change in tappable equity from 4Q2019 to 4Q2021 is over 100%!

The pandemic has supercharged the home equity amounts of practically every city and town in America. As a result, any downturn in the housing market won’t be nearly as rough as it was during the global financial crisis.

The financial quality of homebuyers since the 2009 crisis has been very high compared to before 2008. Meanwhile, the supply of homes remains stubbornly low, and will likely continue to remain low given the majority of mortgages are 30-year fixed-rate mortgages under 4%.

If you’ve locked in a low mortgage rate, it’s hard to let it go, especially if you have to go and buy a new place with a higher mortgage rate. Instead, the financially savvy homeowner may rather rent out their primary residence and upgrade to a new primary residence if they have enough funds.

Supply of homes in America 2022 helping increase tappable equity

Ideas For Spending Your Tappable Equity

I don’t recommend using your home as a piggy bank. Leveraging your home equity to buy another home with debt is risky, especially if the new home violates my 30/30/3 rule. However, if you must tap your home equity, then the only thing I can recommend spending money on is home improvement.

After about 20-25 years, home remodels start looking tired. Further, fixtures and appliances begin to wear out. Therefore, you may want to use your tappable equity to upgrade your home.

Using your home equity is like a company using its retained earnings to grow. Do so wisely and the valuation of your home will grow. However, spend too much on remodeling and you may end up losing money.

The easiest home improvement items to spend money on are fixtures and appliances. You’ll be amazed how much new faucets, cabinet handles, door handles, refrigerators, washer dryers, and dish-washing machines can improve the look of your house.

Painting the exterior and interior of your house is also a nice use of home equity. So is upgrading your windows and doing some landscaping.

In general, it’s always a good idea to keep your funds within the same asset class. If you start co-mingling funds too much, you might run afoul of your normal risk parameters.

Make Your Home Equity Untappable

Despite the incredible amount of home equity that has been created since 2010, I would remain disciplined by leaving your home equity alone. Tappable equity can also decline.

It’s much cheaper and easier to just use cash flow to fund your spending. If you don’t have the cash flow or funds, then save more or work more. However, opening up a HELOC when times are good to use in case of an emergency isn’t a bad idea.

As soon as you start tapping your home equity, you might start getting addicted to the source of funds. The same thing goes for borrowing from your 401(k). Don’t touch it. Just because you have access to funds doesn’t mean you should use it.

Try to keep the home equity growing by consistently paying down your mortgage. Avoid doing a cash-out refinance to buy risk assets like stocks either. By the time you’re in your 60s, you’ll be glad you continued to pay down your mortgage.

Readers, have you calculated your primary home’s tappable equity? If so, do you plan to tap it? How will it be used?

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