A Mortgage Bankers Association report released in October 2017 estimated that the number of consumers who would get a home equity line of credit (HELOC) will double over the next five years. The report estimated that approximately 10 million home owners would get a HELOC from 2018 to 2022. This would be double the 4.8 million who got home equity lines of credit from 2012 to 2016.
The Mortgage Bankers Association and TransUnion sponsored the study, and both companies stated that home equity has now surpassed what people had during the housing boom in the mid-2000s. So, TransUnion believes that as many as 11 million consumers will get HELOCs in the next five years.
A HELOC is a line of credit that uses the equity in your home as a way to get the cash you need for anything from home renovations to paying for college tuition. HELOCs have a variable interest rate that is tied to current interest rates. Generally, the rate starts low with a teaser rate, and often is an interest only payment during the draw period of five or 10 years. This makes a HELOC very attractive for people who want to get money for large expenses.
- It is estimated that approximately 2/3 of home owners could be eligible for a HELOC today. This means that as many as 65 million home owners may meet current eligibility requirements to get a home equity line of credit.
TransUnion estimates in the above report that these are the most common reasons that people are opening HELOCs today:
- Debt consolidation: Paying off credit cards or personal loans. A HELOC is often a good choice because the loan is secured by the property and results in a lower interest rate. This is 30% of the HELOC market today.
- Paying a large expense, such as a home renovation project – 29%.
- Refinancing an earlier HELOC to get a better rate – 25%.
- Piggyback; concurrent with a first mortgage to avoid PMI – 9%
- Undrawn; using the credit line as a rainy-day fund – 7%
If you are thinking about pulling cash out of your home, there are several reasons you may want to do it now in 2017:
Interest Rates Are Going Up
As of the end of October 2017, mortgage rates are on the rise again. This has led to the total mortgage application volume to fall by almost 5%. The increase in rates is hitting people who want to buy a home the most, with a 6% drop in applications. Some experts think this is more to do with the lack of good homes than the interest rates.
Interestingly, mortgage applications to refinance a mortgage fell 3% last week and are down 35% from a year ago. The MBA is forecasting that there will be a 28% drop in mortgage refinances in the next year because rates are supposed to go up more.
If that is the case, it may make more sense to get a HELOC and keep your first mortgage in place if you need to get cash. People who got a first mortgage in the last few years may have a lower rate than they will be able to get in the next year or two.
Home Prices Are Rising
Around the country, higher home prices are showing up in mortgage applications. The average mortgage loan amount for new purchases was $317,000 in October, which was the highest since May 2017.
As home prices continue to rise, the amount of equity that people have in their homes also will go up. It makes sense to start pulling that cash out and putting it to effective use before rates rise too much more.
New HELOC Products Are Available
After the last financial downturn, there was a major pullback in lending on HELOCs. Banks often thought the loans were too risky and hard to originate. There were stricter underwriting policies coming down from the federal government as well, so fewer banks were offering lines of credit. Also, there just was not a lot of equity in properties anymore, so many lenders pulled out of the market.
But today, some lenders are getting back into the HELOC market. Lenders are beginning to offer products that are more attractive to home owners who are flush with equity. These products often feature lower rates and longer draw periods before the principal has to be paid down.
There also is more competition coming from the personal loan market. This will likely help the borrower because HELOC lenders will improve their products to compete.
Only Pay Interest on Cash You Use
A major advantage of a HELOC is that it is a line of credit. You only are paying interest on the cash that you actually pull out. With a cash out refinance, you are paying interest on the entire amount of your equity.
Getting a HELOC Is Pretty Easy
If you have decent credit and have been paying your mortgage on time, getting a HELOC is generally a fairly quick process, if you have enough equity in your home.
The Bottom Line on Home Equity Credit Lines This Year
Now may be the best time in years to get a HELOC, given the increase in rates and home values. Unlike a first mortgage, the interest that you pay on a HELOC is not tax deductible any more.