Home equity shrunk or disappeared in the wake of the Great Recession as home prices tumbled, resulting in the disappearance of things like home equity lines of credit.
The disappearance of this financing product cut homeowners off from funds that are typically used to reinvest.
But we’re finally far enough from the Great Recession to see rising home values return across the nation, which is helping home equity lines of credit make a comeback at financial institutions.
About 10 million consumers are expected to take out a home equity line of credit between 2018 and 2022, which will more than double the amount of home equity lines of credit that were originated from 2012 to 2016, according to a study by the credit reporting agency TransUnion.
Homeowners are expected to take out these home equity lines of credit as they gain more equity from rising home prices. These funds are often used to renovate homes, consolidate debt, put children through college, assist with the purchase of an additional home or even be a way to purchase a car.
According to Zillow, home prices in Arizona have gone up 8.8 percent in the last year, raising the median home value to $238,330 as of April. Zillow is forecasting the median home price to reach $247,00 by March 2019.
With more equity available in homes, Desert Financial Credit Union has seen such a boost in demand for home equity lines of credit that it’s been placed in the top five home equity lenders in the Valley on a regular basis, says Cathy Graham, chief marketing officer of Desert Financial Credit Union.
Graham says this increase in demand started in the past two years after a long period where it made zero sense to even talk about home equity loans.
With the value in people’s homes appreciating, they are taking advantage of home equity lines of credit because it’s a competitive option compared with a credit card or an unsecured personal loan, Graham says.
There used to be a stigma around home equity lines of credit and how they’ve been used for the purchase of “adult toys” like RVs and frivolous expenses, Graham says. But that’s no longer the case. Now, homeowners are seeing home equity lines of credit as a viable option that can be used to cost effectively help homeowners with major financial needs, she says.
Better alternative, better homes
The Federal Reserve has raised the key interest rate to the highest level it’s ever been since 2008 and the Fed plans to raise rates three times this year. This is having an impact on consumers looking to refinance their mortgage.
Many recent homebuyers got their mortgages or refinanced when mortgage interest rates were at 3.5 or 4 percent, says Greg Thorell, residential lending manager at Pinnacle Bank.
This is compared with the current mortgage interest rates that are averaging at 4.55 percent nationally for a 30-year fixed-rate mortgage, according to Freddie Mac.
When consumers were refinancing at 3.5 or 4 percent, they would pull the equity out of their homes with a new first mortgage, Thorell explains.
“Now, with those rates going up, homeowners don’t want to give up that low rate they have on their first mortgage,” Thorell says. “So they’re turning to the home equity loan market to do the debt consolidation loans, or renovations, or whatever they might want to use it for instead of refinancing their house.”
Building the dream home
With the stronger economy and rising interest rates, people aren’t moving and are instead looking into home equity lines of credit and starting remodeling projects with those funds, says Paris Davis, senior vice president and Northwest Arizona Division Manager at Washington Federal.
“We’re getting low in housing inventory and, generally, if you don’t have at least a six-month supply of inventory, that’s where you can see more of a driver for people wanting to stay in their homes,” she says.
Instead of going out into the housing market to find their dream home, people will use renovations to turn their current home into a dream home, Davis says.
With folks moving towards home equity lines of credit, financial institutions now have a better opportunity to deepen the relationship with clients, while also adding to the portfolio, Davis says.
Financial institutions are looking for people with strong credit scores and for those who are looking into reinvesting the money into their home or a child’s education.
Strong guidelines regulating who’s eligible for home equity lines of credit have been put in place since the Great Recession, Davis says. This has been helping consumers so they aren’t borrowing more than their home’s value, especially when home values can fluctuate, she explains.
Also, for those looking to stay in the home that is the collateral for the home equity line of credit and make that home a forever home, there are a lot of benefits.
“Home equity lines of credit are a great product for those types of individuals,” Davis says of people who are living in their forever homes, “because they’re adding value and potential equity in their home. They are happy to not have to go out and purchase a new home and sell their current home.”
Be mindful as equity returns
With homeowners earning more equity in their homes and the home equity line of credit coming back as an available avenue for a loan, lenders and borrowers need to be mindful of a few things, says David E. Funkhouser, partner at Quarles & Brady.
• Borrowers need to remember the Great Recession. They should be cautious of not using up all of the equity in their homes as they seek a home equity line of credit, Funkhouser says.
• Home equity line of credit lenders should also be aware that they’re in the second position behind the senior lender if the borrower stops paying, he says.
• All of the collateral could get taken by the senior lender if the home equity line of credit lender isn’t the same institution, leaving the home equity line of credit lender with no collateral, Funkhouser says.
• Keep an eye on the underlying value of the collateral because the economy could change quickly and the home could lose its value, he says. But, “If there’s enough to go around, everybody can be protected,” Funkhouser says.