More Owners Are Using Their Equity Again

Home prices continue to rise and more homeowners are tapping into their home equity, making home equity lines of credit and cash-out mortgage refinances popular again.

Home equity line originations jumped 8 percent to nearly $46 billion in the second quarter. That is the highest level since 2008, according to data from Equifax, a credit reporting firm. Cash-out mortgage refinances reached $15 billion, a 6 percent increase from a year ago, according to Freddie Mac.

“If customers feel like their home values are stable or increasing, and if they feel like their job prospects are good—that they will have the ability to pay back a loan they take—then they will start to take out more home-equity lines,” says Mike Kinane, head of U.S. consumer-lending products at TD Bank. “This is what we are starting to see.”

The median sale price of an existing home surged to $263,800 in June, a new record high, according to the National Association of REALTORS®. Sales prices are up 40 percent from $187,900 at the start of 2014.

Lenders say they’re being more cautious in how they are issuing HELOCs nowadays, much moreso than in the housing bubble days, when consumers took equity out of their homes at a record pace.

“We continue to watch what’s going on and the way it’s being done, but it’s much different from before the crisis,” Tom Wind, head of U.S. Bancorp’s home mortgage division, told The Wall Street Journal. Lenders say more owners are using these loans to take on renovations or consolidate debt, which are considered investments rather than luxuries.

Beyond rising home prices, low interest rates on home equity lines of credit are making them a more attractive option, too. The average interest rate was about 5.6 percent, according to Bankrate.com. Credit cards average 16.7 percent.

As the housing bubble showed, there are risks to these types of loans. Cash-out refinances can extend the length of a mortgage and cost a borrower more in interest over the life of the loan. If home prices do fall, a borrower could become overextended and be at risk of owing more on their mortgage than their home is currently worth.

Regardless, home equity lines of credit are hardly at levels like the boom days and owners are taking them out more cautiously.

As of early August, U.S. banks held about $387 billion in revolving home equity loans, which is still down more than 35 percent from a peak of about $610 billion in early 2009, according to the Federal Reserve.

Source: “Tapping Your Home Equity for Cash Is Big Again,” The Wall Street Journal (Aug. 28, 2017) [Login required.]