Americans are sitting on tons of home equity, but the cost to tap it is getting too high.

In the first quarter of 2022, total home equity for all owner-occupied properties grew by $1.6 trillion to $39.7 trillion from the previous quarter. According to the latest data from the New York Federal Reserve, homeowners gained an average 16.2% year over year in June, the largest quarterly increase since the Great Recession.

At the same time, mortgage rates have risen by more than 2 percentage points since the start of the year, remaining above 5% since mid-April. Rates could go higher as the Fed continues to hike its benchmark rate to tame inflation.

That’s made it more unattractive for homeowners to unlock their housing wealth by trading up, cashing out through a refinance, or borrowing against what is often their biggest asset.

“That’s going to be a challenge for homeowners,” Scott Sheldon, branch manager at New American Funding, told Yahoo Money on folks tapping their equity. “They either have to bite the bullet and just accept the nature of the beast or they have to wait on their home improvement.”

Not willing to sell

According to CoreLogic, homeowners with a mortgage gained an average $63,600 in equity per borrower during the first quarter of 2022, an increase of 32.2% year over year. Homeowners in states like California, Hawaii, and Washington saw even bigger gains, with their equity increasing by more than $100,000.

But as mortgage rates rise, homeowners have become increasingly reluctant to capitalize on their equity gains by selling.

“Home prices have appreciated in double digits. This benefitted existing homeowners because they were able to accumulate a large amount of money they could use in equity to purchase their next home,” Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors, told Yahoo Money. “But now we’re seeing a stay-in effect where existing homeowners are not willing to sell their home.”

It’s not surprising that some homeowners are hunkering down, Evangelou said, as tapping into that equity has become “more expensive” as rates and prices continue to increase.

According to Realtor.com, the national median listing prices for active listings jumped to $450,000 in June, up 16.9% compared to last year and up 31.4% compared with June 2020. In large metro areas, median listing prices grew by 13.3% compared with last year.

“Homeowners will decide ‘I don’t want to sell my house because I can’t find what I already have,’” Evangelou said. “We can expect affordability to weaken further… with rising rates, everybody is expected to be impacted.”

Not willing to cash out

Homeowners are also growing more conservative about cashing out on their home equity gains through refinancing.

“It just would not make sense,” Adriana Perezchica, president of Via Rkeal Estate Group, told Yahoo Money. If you refinanced in the last three years, it will double their interest rate now.”

Last year, homeowners took out a record $1.2 trillion in cash-out refis, with more than 1 million cash-out refinance loans registered in the fourth quarter of 2021, according to mortgage technology and data provider Black Knight.

Although cash-out refis are more resistant to rising mortgage rates, the rapid increase in rates is now eroding demand. For instance, rate locks on cash-outs were down 42% year over year in May – according to Black Knight’s latest figures – with early data from June suggesting those locks are now 50% down from the same time last year.

“It’s hard for a homeowner who went into a mortgage two years ago at a 3%, 30-year fixed rate to give that up and go into a 6% cash-out refinance,” Sheldon said. “It’s hard to go up by 300 basis points. That’s a tough nut for people to bite off.”

Not willing to borrow

Anticipated interest rate moves by the Federal Reserve are also weakening demand in home equity lines of credit, also known as HELOCs.

Balances on home equity lines of credit were relatively flat during the first quarter of 2022, according to the NY Fed’s household debt report — and have remained that way for the past three quarters. As of May, the outstanding HELOC balance stood at $317 billion.

With inflation levels running at 40-year highs, the likelihood that the central bank will hike its benchmark rate by one percentage-point this month got stronger. Since rates on home equity lines of credit are often variable and tied to this benchmark rate, this means the rates on HELOCs will increase down the road.

“If you’re going into a home equity line of credit, you’re basically going into a debt that’s going to keep going up,” Sheldon said. “The rates are going to keep going up and the payments are going to keep going up as you borrow on that home equity line. That’s going to be a challenge.”

“I think people really are underestimating the intensity of what that looks like, they’re looking at [home equity] like Monopoly money,” Sheldon said.