In case you hadn’t heard, home equity lines of credit are expected to get a lot more popular in coming years as homeowners take advantage of all that recent home price appreciation.
A new TransUnion study reveals that some 10 million borrowers are expected to take out a home equity line of credit (HELOC) between 2018 and 2022.
If that happens, it would be more than double the 4.8 million HELOCs originated during the previous five-year period between 2012 and 2016.
HELOCs Expected to Surge in Popularity
- Thanks to a combination of rapidly rising home prices
- Coupled with higher mortgage interest rates
- Second mortgages like HELOCs should become a lot more popular
- As a means to tap into all that newfound home equity
You can thank rising home prices, which have increased aggregate home equity to levels above those seen in the mid 2000s.
Back in 2005, when collective home equity stood at $13.3 trillion, there were an astounding 4.9 million HELOCs originated.
Then HELOC volume tanked as the housing crisis stripped away trillions in home equity, leaving homeowners with just $6.3 trillion to play with.
That resulted in a dismal 600,000 in HELOCs during 2011, and similarly low numbers in the years that followed.
In 2016, collective home equity surged back to around $13.3 trillion, but just 1.2 million HELOCs were taken out, clearly a sign that many more are on the horizon.
Keep Your First Mortgage Intact
- One benefit to a HELOC is that it’s commonly a second mortgage
- Meaning if you have a super low interest rate on your first mortgage
- You can leave it untouched and continue to enjoy that low fixed rate
- And you won’t restart the clock on it either by avoiding a refinance
This is especially true as mortgage rates rise, seeing that borrowers won’t want to give up their ultra-low fixed-rate first mortgages.
The credit bureau is projecting 1.4 million new HELOC borrowers this year and 1.6 million in 2018, which represents a roughly 30% increase from the prior two-year period from 2015 to 2016 (1.1 million and 1.2 million).
As it stands today, more than two-thirds of homeowners could be eligible for a HELOC because they meet current requirements, such as having a loan-to-value ratio of 80% or less.
That amounts to approximately 65 million homeowners who could tap their equity.
TransUnion senior vice president and mortgage line of business leader Joe Mellman expects anywhere between nine and 11 consumers to take part in this HELOC boom over the next five years.
The question is what will they do with all that equity?
Debt Consolidation Top Reason to Tap Equity
- The most common reason to take one out is to tap equity
- Of which there is plenty thanks to all that home price appreciation
- They’re also used to fund a large expense such as home renovations
- Or simply for dry powder in the event cash is needed in the future
The number one reason to take out a HELOC per the study’s estimates is to consolidate debt, which grabbed a 30% share.
Essentially, homeowners can pay off other high-interest rate debt like credit cards, often in the 20% range, and enjoy a much lower rate on the HELOC.
Not far behind is the need to finance a large expense, with a 29% share. The money could be used to finance a major renovation project, such as a new bathroom or addition, or to fund a down payment for another property purchase in the near future.
Refinance a HELOC
- Some homeowners may take out a HELOC
- For the sole purpose of refinancing any existing HELOC
- This tends to happen 25% of time one is originated
- Motivated by the resetting rate which could see monthly payments jump considerably
Another very common reason to take out a HELOC is to simply refinance an existing HELOC (25% share). Just like regular first mortgages, you can refinance a HELOC, either by rolling it into a new first mortgage or by taking out a new HELOC altogether.
The motivation to do so is often related to the HELOC resetting to a fully-amortized mortgage payment, which could result in a big jump monthly payment wise.
TransUnion estimates that another nine percent of HELOC borrowers will take them out to use as piggyback mortgage financing. This was more common prior to the housing crisis, but seems to be resurfacing.
Instead of taking out a loan for more than 80% of the value, a borrower can take out a first and second mortgage concurrently, with the HELOC acting as the second mortgage. Doing so allows the borrower to avoid mortgage insurance and potentially receive a lower blended interest rate.
The final reason to take out a HELOC is simply to set aside dry powder for a rainy day (7% share). Some folks just like the idea of having an emergency fund on hand if and when necessary.
And it can be wise to apply for the HELOC while your finances are in good standing, not later when you’re desperate for cash.