Americans are using their home equity faster than ever apart from the period that came right after the housing bubble 10 years ago. It can become a concern, leaving us wondering whether we are headed back to the days when people had mortgages over their homes in order to fund their holidays and daily expenses.
A home equity line of credit is a loan in which the lender agrees to lend a maximum amount within an agreed term, where the collateral is the borrower’s equity in his house. The national credit bureau underlined the fact that lenders extended, within the first half of 2015, more than 650,000 home equity lines of credit amounting to up to $70B. It shows an increase by 15% of new lines of credit and the total dollar limit went up by 24% compared to 2014, which is the highest score since 2008.
The worse is that it is not only owners who have the best credit ratings who got these home equity lines of credit. Indeed, borrowers having mediocre credit scores, i.e. below 620, got credit lines (9,600 with total dollar limits of $338M). It corresponds to a 30% increase as compared to last year.
In the meantime, one can witness the comeback of cash-out refinancing. 34% of all refinancings that occurred between April and June 2015 consisted in owners adding principal balances to their mortgage and saving the extra cash. It amounted for $11.4B, the highest quarterly rate for cash-outs for the past 6 years.
Should we worry? Consider home equity lines of credit as flexible lines that are tied to your home. Their interest rates are often floating and pay-back is only required after a pre-set term. Installment loans, on the other hand, are second liens coming with regular repayment terms and fixed rates. They are the right solution in case you need a specific sum within a single payment. Finally, cash-out refinancings appeal to owners with enough equity stakes and a reliable payment history regarding the refinanced mortgage. It enables borrowers to double their initial balance.
In periods of growth in home equity and home sales value, these 3 techniques are very popular. It can also be a crash warning. However, underwriting seems to be much stricter now. What about the subprime borrowers that are still getting a good proportion of home equity lines? It is not exactly the case as they only represent 1.5% of all home equity lines of credit overall. Standards should be safer than before so only people with proper equity and a legitimate need for financing will supposedly get these lines.