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Ever since the epic housing crash of the last decade, homeowners have been incredibly conservative with their housing debt.
Home prices rose, at first slowly and now quite dramatically, yet owners held back on taking out all that new-found equity. That is about to change — by a lot.
About 10 million homeowners are expected to take out home equity lines of credit in the next four years, according to a new report from TransUnion.
That would be more than double the amount of originations between 2012 and 2016. This comes as the amount of available home equity has jumped to more than $13 trillion today from $6.3 trillion in 2011, the bottom of the last housing crash.
HELOCs, which are often loans after the primary mortgage, usually rise and fall along with home equity, but that didn't happen following the recession. There was a significant pullback in lending, as banks considered the loans too risky and too difficult to originate, given the stricter underwriting guidelines that were implemented.
Some lenders got out of the business because there just wasn't enough demand. Borrowers simply didn't have the equity because home values had fallen so far. Even as values rose, borrowers didn't rush in immediately.
"I think it is some of the hangover. On the consumer side there are some residual feelings," said Joe Mellman, senior vice president at TransUnion.
Now, lenders are getting back in, hoping to make up some of the business they've recently lost in the refinance market. Because interest rates are higher, mortgage refinance applications are down more than 35 percent from a year ago, according to the Mortgage Bankers Association.
Lenders may now start to offer new HELOC products that are more attractive to borrowers with lower rates and potentially longer "draw" periods before principal has to be repaid. They will face new competition in the market, however, in the form of personal loans made via technology.
"The supply spigot will start to turn up," said Mellman, "Fintechs have done a fantastic job innovating their products that younger generations have gotten used to. HELOCs have not seen that innovation."
Still, the demand will likely be there, as consumers use their home equity for several reasons. First, they will use it to repair and renovate their homes. With the housing supply so low, more homeowners are staying where they are, unable to find or afford a move-up home. Instead, they add on or upgrade what they have. Remodeling activity has been rising steadily and more dramatically this year.
"Recent strengthening of the U.S. economy, tight housing inventories, and healthy home equity gains are all working to boost home improvement activity," Chris Herbert, managing director of the Joint Center for Housing Studies, wrote in a recent survey.
"Over the coming year, owners are projected to spend in excess of $330 billion on home upgrades and replacements, as well as routine maintenance," Herbert said.
Borrowers may also use their home equity to consolidate other debt and to lower interest rate payments. Mortgage rates are rising slowly, but are still relatively quite low. Home equity lines can offer a borrower a 10-year interest-only term before principal payments kick in.
And that's the other reason for new HELOCs — to refinance old ones taken out 10 years ago. Borrowers may not want to pay the added principal, so they can refinance into a new loan and reset the draw period. That may seem easy now because of low interest rates, yet consumers should understand that that may not always be the case because the rate on HELOCs are not always fixed.
"The tradeoff is that this type of program is typically set up as a variable rate that fluctuates based on the movement of the U.S. prime rate — a rate that has risen three-fourths of a percent in the last year and [is] expected to continue this trend for the foreseeable future," said Matt Weaver, vice president of sales at Finance of America Mortgage.
"So if you are someone who is confident in your ability to pay off a line of credit in a short period of time, a HELOC could certainly be a great option for accomplishing your remodeling goals," he said.
If a borrower's budget is tighter, he or she should consider something more long term, according to Weaver. In that scenario, it's best to explore other options that provide for a fixed payment schedule tied to today's current low rate.