The 2008 housing crisis continues to affect the market today. After the crash, home prices reached a low point in 2012, according to the S&P/Case-Shiller Home Price Indices. Since then, housing prices have recovered. And, the rise in prices and home values seems to also be encouraging borrowing, including home equity lines of credit (HELOCs).
According to TD Bank’s HELOC Reset Measure survey, a poll of over 800 HELOC borrowers, three in 10 of respondents opened their HELOC since 2014. A HELOC is a convenient way homeowners can use their home’s equity in order to renovate their home, make a large purchase or fund other needs. But in order to make a HELOC work for you, you need to know how a HELOC can impact your financial situation.
So although the U.S. might not be headed for a housing crash soon, there are other ways current homeowners are vulnerable to a potential housing crisis. Here are seven lessons for homeowners to learn from the 2008 crisis.
1. Low Interest Rates
Tip: Take advantage of low rates on HELOCs — responsibly.
In the last housing crisis, extreme borrowing was named one of the biggest culprits. And, low interest rates along with moderate inflation is one of the factors that often leads to strong growth rates in borrowing.
Because borrowing rates have been increasing, some might think another housing crisis is in the near future. But with a thought-out plan, plus guidance from your bank, today’s economic atmosphere could be a boon instead of a bust.
The truth is, today’s low interest rates are creating more flexibility for homeowners, and — not surprisingly — HELOCs have become quite popular again. Just take a look at some of the statistics on HELOC borrowing, according to TD Bank’s survey findings:
- 29% of respondents took out a HELOC before 2008
- 54% have taken out a HELOC in 2011 and onward
- 60% of HELOCs taken out before 2011 have credit limits of $50,000 and above
- 68% of HELOCs taken out in 2011 and onward have credit limits of $50,000 and above
- 64% of current HELOCs have a credit limit of more than $50,000
But although borrowing has increased, borrowers have to meet strict criteria to get approved for a HELOC. In other words, borrowing rates haven’t gotten out of control like they did during the last housing bubble. And, it seems likely that increased borrowing and credit limits are signs that homeowners are carefully planning for the future rather than speculating on rising home values and prices.
“Industry-wide, limits are going up but very cautiously,” said Mike Kinane, senior vice president of home equity at TD Bank. “We’ve seen a resurgence in both lending volume and increased limits, but it hasn’t been aggressive. Rather, it has been a fairly prudent increase in line sizes, driven by borrowers with strong credit scores and incomes, plus significant equity in their homes.”
2. Rising Incomes and Home Values
Tip: Make sure you can afford to pay back your HELOC.
Home prices and values are increasing across the nation. In fact, many cities are seeing home prices skyrocket to levels not seen since the housing bubble.
Incomes are rising as well. For the first time since 2011, incomes are increasing faster than housing prices: Home values rose 5.1 percent in the last year while incomes rose 5.2 percent. And, rising incomes coupled with higher home values might be encouraging people to take out HELOCs.
But to avoid déjà vu and a repeat of the 2008 housing crisis, make sure you can really afford to pay back your HELOC when the time comes. It seems that those who have taken out HELOCs do have enough money to pay them back — as well as enough value in their homes.
“Having a solid home with good value and a steady job is leading consumers who have been in their house long enough and need renovations to consider HELOCs,” said Kinane. “They start to think about what they want to do around the home, and the rising home values make them more confident to execute a renovation.”
3. HELOC Resets
Tip: Figure out what you’re going to do after your HELOC resets.
During the housing boom, HELOCs made sense as a convenient way to gain access to money because home values were strong and expected to continue rising. But now, many of those HELOCs taken out during the housing bubble on the assumption home values would continue to rise indefinitely are resetting. According to TD Bank’s survey, a large number of U.S. homeowners (43 percent) will be affected by a HELOC reset.
When a HELOC resets, its draw period — which is the period of time you can borrow on your line of credit and pay only the interest — is ending. The repayment period then begins, and you start paying the fully amortized payment, which is interest plus principal.
A HELOC reset can be a major financial challenge to homeowners. But, a homeowner has options, including refinancing into a new HELOC, or allow it to reset into an amortizing payment, or even pay it off. With home prices on the rise across the U.S., homeowners have the opportunity to use their home’s equity in a very strategic manner.
But utilizing your home equity in a smart way requires careful planning. Unfortunately, 23 percent of people have no plan when the HELOC draw period ends, found TD Bank’s survey.
To protect your finances, don’t be one of these people without a HELOC reset plan.
4. HELOC Contract Details
Tip: Review lender information about HELOC contracts.
TD Bank’s survey also found 27 percent of respondents don’t know when their HELOC draw period ends, which could be devastating if they haven’t financially prepared themselves for the repayment period. However, this seems to be an issue of forgetfulness, rather than negligence.
“By the time [customers] get to closing, they are eager for the funds,” said Kinane. “Nine to 10 years later, customers have to remember that a reset is happening. That’s why it’s less ‘uninformed,’ and more that they just don’t remember.”
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The best way to keep up on the financial details and prevent something going wrong with your home or home loan is to pay attention to your lender. Your bank will send you reminders before your draw period ends, and you also have the option to call in, go online or visit in person if you need help. HELOC lenders at TD Bank, for example, make sure their customers are well aware when the end of the draw period occurs — and what it entails.
“Banks are required to disclose exactly what’s happening on the customer’s loan,” said Kinane. “We can’t give a loan without describing how it works and ensuring the customer understands that. Throughout the process, and ultimately when they sign the documents, we stress to the borrower what type of product it is and what it does does, and notify them ahead of their reset date.”
If you’re part of the 58 percent of respondents whose HELOC is resetting in the next five years, the reset itself is not a major problem. By working closely with your home equity lender, you can prepare for the coming repayment period, either by refinancing or paying back the line of credit.
5. Monthly Payment Increases
Tip: Know what impact your HELOC’s draw period expiration will have on your monthly payments.
Although it has been a few years since the crash — and homeowners have had time to learn from past mistakes — homeowners should remain fully informed about the financial impact of their HELOC’s draw period expiration.
In fact, 43 percent of respondents in the survey said they don’t know the impact the expiration will have on their monthly payments. Additionally, only 19 percent of respondents understand that a HELOC reset will increase their monthly payments. Worryingly, 38 percent of respondents think their monthly payment will actually go down when their HELOC resets.
But a lack of awareness can be remedied fairly easily. Understanding a HELOC’s financial impact means working closely with your lender, who can tell you how the reset will impact your financial situation.
6. Higher Interest Rates
Tip: Consider getting a fixed-rate HELOC.
HELOC rates are based on prime rates, which are subject to changes in the federal funds rates. A change in the Fed rate means HELOC rates are affected as well. So, a rate hike would mean increased monthly payments for HELOC borrowers.
“When rates rise up, that may accelerate customers thinking about what they should do with the debt (i.e., refinance or pay it off),” said Kinane.
This acceleration in customers’ thinking could get in the way of careful decision-making, as almost one-quarter of respondents to TD Bank’s survey said they don’t have a plan for when their HELOC draw period ends.
For this reason, stay in contact with your lender and research your HELOC options. For example, the TD Bank HELOC offers a fixed-rate HELOC option for those borrowers that don’t have the appetite to manage future rate hikes.
7. Stagnant Home Values
Tip: Protect your home’s value by using a HELOC for renovations.
Keeping in touch with your bank is one of the best ways to maintain realistic expectations. Home equity lenders at TD Bank, for example, set customer expectations while making sure you’re informed about ways to utilize a HELOC if you have equity in your home.
Take home improvements and repairs, for example. Home renovations are one of the most popular uses of HELOCs, with 38 percent of survey respondents using them for this purpose.
“Home renovation, historically, has been the No. 1 use of HELOCs,” said Kinane. “Customers have taken advantage of a confluence of higher home values and low mortgage rates, and stayed in their homes.”
“Consumer confidence in home values wasn’t there for a number of years for customers to borrow to improve their home,” he continued. “We’re starting to see that confidence again, with higher home values, more customers staying in their houses and low rates. We don’t see that changing anytime soon, but we do see more HELOCs being taken out down the line because of rising home values and people staying in homes longer.”
Home renovations can increase your home’s value, and thus your home equity as well. Plus, with guidance from your lender, you can then get flexible, convenient refinancing when your HELOC resets. In fact, according to TD Bank survey data, 26 percent of respondents intend to refinance their HELOC at the end of the draw period.
Economic signs are almost always open to interpretation. There are trends that could be taken as troubling, but they could just as easily be turned in your favor. What’s needed to fend off the lingering effects of the housing crisis is having a clear picture of your finances, and your lender can help you do just that.