Home-equity lines of credit or HELOCs and closed-end home equity loans increased by a massive 50% in 2022 compared to 2020, based on data from the Home Equity Lending Study by the Mortgage Bankers Association.
Marina Walsh, the VP of Industry Analysis for the Mortgage Bankers Association, attributes this increase to remodeling and home renovation projects. In 2022, around two-thirds of these borrowers said it was why they applied for a home equity loan. Other reasons named were debt consolidation and tapping into emergency cash reserves.
The shortage of housing inventory and high home prices are making home renovations appealing compared to trying to buy a new home and leave a mortgage with a much lower rate. HELOCs or home equity loans are also a good way to cover the costs of a home project, but you can get a tax advantage by deducting mortgage interest.
Walsh went on to say that with almost $30 trillion in accumulated real estate equity, there's potential for lenders and borrowers.
Some of the key findings from the study include:
- The average HELOC commitment volume, or the total credit offered, was $2.4 billion per company in 2022, representing a 41% increase from 2020.
- The dollar volume of outstanding balances on HELOCs compared to the maximum credit availability increased in 2022.
- HELOC utilization in terms of dollar volume was 34% in 2022, compared to 40% in 2020.
- There was a shift in the average credit profile of HELOC borrowers in 2022. The average FICO score dropped from 780 in 2020 to 769 in 2022.
- Annually, lenders anticipate HELOC's outstanding debt will increase by 8.2% this year and nearly 10% in 2024.
Data related to home equity loans include:
- From 2020 there was a 166% increase in average home equity loan originations per repeater company.
- The weighted average outstanding balance on home equity loans went up to $61,114 by the end of the year from $52,653 at the start.
- The average FICO score for home equity loan borrowers dropped to 752 in 2022 from 768 in 2020.
Home equity loans are a way to get money when your assets are tied up in your property. They tend to have lower interest rates than most other kinds of consumer loans because they're backed by your home, like your main mortgage. You use the equity you've built up in your home as a source of collateral to borrow money, and these products are often referred to as second mortgages because you have to make another loan payment in addition to what you pay on your primary mortgage.
In the case of a home equity loan, you receive a large payment as a lump sum, and you pay it back in fixed installments over a predetermined time period. They're usually fixed-rate. The pros of home equity loans include easier qualification standards, lower fixed interest rates, and longer terms than most consumer loans. There aren't restrictions on how you use the funds, and you can access all the money simultaneously. Plus, since your monthly payments are fixed, your spending is predictable.
The downsides include having another mortgage, and if you default on the loan, you risk foreclosure. Additionally, if you were to sell your home, you'd have to pay off the balance of the home equity loan and your primary mortgage at closing.
A HELOC is more like a credit card. You have an amount up to which you can borrow and pay back, but you use only what you need, and you're only paying interest on what you draw. A HELOC may start with a lower initial interest rate than a home equity loan, but it's a variable or adjustable rate, so it can go up or down depending on the benchmark. That means your payments aren't predictable—they can go up or down too.
With home prices not looking to decline in any significant way any time soon and interest rates continuing to rise, many homeowners have plans to stay put for the foreseeable future, so both types of financial products may continue to be a popular options to make your home suited to your needs, rather than shopping for a new one.
No comments:
Post a Comment