Home Equity Bonds Are Surging: Here’s Why

Mortgage rates remain stubbornly high, making homeownership a challenging path for many Americans. In fact, as of June 5, the 30-year mortgage rate stood at 6.85%, according to Freddie Mac; and experts anticipate that it won’t drastically lower for a while.

Like Realtor.com® economist Jiayi Xu notes, “the ongoing uncertainty around government trade, economic and fiscal policy have kept rates elevated.”

She adds: “Despite growing inventory and slower home sales, affordability remains a key challenge. More sellers are cutting prices, but high rates and elevated prices mean the income needed to buy a home is still well above pre-pandemic levels.”

In turn, many homeowners are opting to stay put rather than refinance or sell their homes, with many tapping into their home equity instead.

With that in mind, new data shows that Wall Street is taking notice, as home equity loans are being bundled into bonds and sold to investors.

Just a few years ago, it was very common for homeowners who wanted to convert some home equity into cash to simply replace their existing mortgage with a new, larger one through a cash-out refinancing —or a loan that replaces the owner’s first mortgage with a bigger one.

However, as Bloomberg reports, the trends has changed, with more owners turning to a home equity line of credit (HELOC) or a second mortgage instead.

HELOCs and home equity loans were traditionally seen as a “last resort” type of loan, as they are more high risk. However, they have been on the rise since 2024 because rates for these loans have dropped in comparison to mortgage rates, which have remained high, explains Steve Sexton, CEO of Sexton Advisory Group.

“For some people who are looking to do home renovations or repairs, a HELOC or home equity loan may provide more favorable interest rates than refinancing their mortgage,” he adds.

With a HELOC, your home is collateral for the loan, so a significant downside is you risk losing your home if you can’t make loan repayments—which is why advisors generally categorize HELOCs as a last resort.

Sexton notes that, similar to HELOCs, home equity loans also leverage the equity you’ve built up in your home as collateral. However, home equity loans provide a single, lump-sum payment and require you to repay this with a fixed interest rate over a specific period, he adds.

“Because of the fixed interest rate, home equity loans tend to be more predictable in terms of calculating your monthly payments and interest costs. Like HELOCs, defaulting on loan repayments can cause you to lose your home,” Sexton says.

Wall Street is noticing and is bundling these loans into bonds, as there is an eye-popping $35 trillion of that equity to tap into, according to the Federal Reserver Bank of Saint  Louis.

This is also known as securitization, a concept that is not new and, unfortunately, played a significant role in the 2008 housing crash and financial crisis.

“Wall Street has been bundling HELOCs and home equity loans into home equity-backed securities and selling them to investors,” says Michael Santiago, CRPC, senior editor at Annuity.org.

He says that these securities are similar to mortgage-backed securities, as they are backed by homeowners with strong equity positions and provide higher yields.

“One reason investors are drawn to them is that this is a way to profit from rising home values and low default rates,” he says.

One of these newer iterations are home equity contracts (HEIs), new financial products “in which homeowners get an upfront payment from a company and, in exchange, must repay a single lump sum repayment in the future that is based, in part, on the home’s value,” as the Consumer Financial Protection Bureau (CFPPB) explains on its website.

This is somewhat reminiscent of the rise (and fall) of mortgage-backed securities leading up to the 2008 financial crash. In mid-2008, “more than 60% of all U.S. mortgages were securitized—pooled to form mortgage-backed securities,” (MBS) according to the International Monetary Fund (IMF).

Many of these bundled securities were based on subprime mortgages, which became delinquent, creating a domino effect that eventually led to a market crash.

However, this differs from 2008.

Santiago explains that today’s home equity loans are mainly going to creditworthy borrowers, which is a stark contrast to the risky subprime mortgages leading to the 2008 crash.

“Overall, underwriting is stricter than it was, and the bond structure is much clearer. However, if the value of homes does fall, second-lien loans could still be at risk, which makes the system have more stability, but not immune to risk,” he says.

Sexton notes that the current surge in home equity bonds, especially those tied to HEIs, or home equity investments, have more than tripled in the past year. Yet, he also cautions homeowners considering this route as a means of financing a renovation project to tread carefully.

“HEIs resemble adjustable-interest rate mortgage products from the 2000s that resulted in massive losses to investors. Unlike traditional home equity loans, HEIs are more sensitive to fluctuations in the housing market and therefore may result in more complex repayment structures tied to the home’s value,” he says.

HEIs also tend to attract borrowers with lower credit scores, which implies a higher risk of default for investors. And while we’ve seen limited foreclosure risk as of now, we can expect problems to arise should home prices and unemployment experience a sustained decline, he adds.

The feeling among experts is that this surge could continue—at least for now.

As long as mortgage rates, home prices, and employment rates remain high, we can expect homeowners to continue seeking alternatives, such as HELOCs, home equity loans, or HEIs, to finance their renovation projects. So, are there benefits for an average investor or homeowner to take advantage of here?

One of the advantages of this home equity borrowing trend is that it gives access to relatively lower interest rates: Home equity loans and HELOCs often offer lower interest rates compared to other borrowing options like personal loans or credit cards, says Alex Blackwood, co-founder and CEO of mogul Club, a fractional real estate investing platform.

It also enables owners to leverage existing home equity.

“Homeowners are currently sitting on significant amounts of home equity, allowing them to borrow against it without impacting their existing mortgage,” Blackwood adds.

One of the key disadvantages is that your home is used as collateral, putting it at risk of foreclosure if you fail to make payments, explains Blackwood.

In addition, while rates have been declining, their future trajectory is uncertain, especially for HELOCs.

Finally, home equity loans may involve closing costs, such as origination and appraisal fees. If the value of your home declines, you could owe more than your loan is worth, Blackwood says.

“Obtaining a home equity loan can take time (weeks to months), which may not be ideal for immediate financial needs, he adds, noting that tighter lending standards and economic uncertainties may make it more challenging to qualify for home equity borrowing.

The CFPB also notes that HEI carry several consumer risks, as “homeowners who cannot pay the full settlement amount might be forced to sell their home or face foreclosure.”

In addition, the agency notes that these are  complex financial contracts.

“The current lack of standardized disclosures can make it difficult to understand them or compare them to other options,” it adds.

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