Home equity is back and homeowners are loving it

As home prices rise, homeowners are wasting no time making use of their newfound, or regained, home equity. In fact, while all mortgage originations rose in the third quarter of this year, the biggest gain was in home equity lines of credit (HELOCs).

Originations of these loans, which are often in addition to primary mortgages, jumped over 17 percent for the quarter, according to Inside Mortgage Finance, a mortgage industry publication: $20 billion in new HELOCs, which is the most quarterly volume for the product this year.

Suburban house
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At the current rate, lenders could originate more than $67 billion in HELOCs for all of 2014, which would be the most since 2009. Volume is still low by historical standards, but the gain points to not only more home equity available, but more confidence among consumers that they can tap their homes again for much-needed cash. There has, however, been a shift in the borrower mindset.

"It certainly seems like people are doing it a lot more responsibly now," said Rick Huard, senior vice president of consumer lending product management at TD Bank. "People seem to be much more educated customers and much more responsible."

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They have to be, because on the flip side, lenders aren't just handing out the loans to anyone with a pulse. During the last housing boom, borrowers extracted trillions of dollars worth of home equity, spending it on luxury goods and vacations, as lenders turned a blind eye to basic safeguards, like the ability to repay the loan or the borrower's other debt load.

Today, lenders are following more stringent guidelines enforced by federal regulators, and most HELOC borrowers are using the money to improve their homes, adding value to their largest asset, not subtracting it.

A survey of more than one thousand HELOC borrowers by TD bank found many using HELOCs to consolidate other debt, thereby lowering interest rates (29 percent); credit cards can carry interest rates more than four times that of a HELOC. Others used the loans for automobiles (27 percent), emergencies (19 percent) or education expenses (20 percent). Some are refinancing HELOCs they already have.

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"People are readdressing or redoing," said Craig Strent of Maryland-based Apex Home loans. "That has probably resulted in this increase in equity line originations."

HELOCs usually have a "reset" period of 10 years, after which borrowers have to start paying back principal on the loans in addition to interest. The Office of the Comptroller of the Currency recently estimated that $167 billion worth of HELOCs would reset to higher monthly payments between 2014 and 2017. By taking out a new HELOC to pay off a current one, homeowners can start that 10-year credit period over again.

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Some are using home equity lines in order to avoid having to use jumbo loans to buy a home. Jumbo loans, usually higher than $417,000, can have lower interest rates, but they require higher credit scores and larger down payments. By using a second lien, like a HELOC, a borrower can keep the primary loan in the conforming range.