When it comes to real estate, a new trend is emerging showing that people are preferring to stay home and invest in their current property than move. To do so they are tapping into the value they’ve built in their home with a new home equity line of credit (HELOC) or home equity loan in order to make improvements and reinvest more than ever in recent memory.
According to American Banker, which pulled data from the Urban Institute’s Housing Finance Policy Center, national lenders signed off on more than $100 billion in HELOCs in the first half of this year — that’s an impressive increase of 50% more than this time last year.
Much of the reason for this is rationalized by the growing interest rates for new homes (the Federal Reserve raised rates in July to help combat inflation and will assess another possible hike this month). There’s also the fickle housing market which has cooled this summer, says CNBC, with one in five homeowners lowering asking prices with less movement from buyers. Many experts also fear we are entering a housing recession.
Given this, many current homeowners have been locking into new HELOCs and loans, tapping into the increased equity they have built from rising home prices in the past few years driven, until more recently, by record demand during the pandemic, says Next Advisor. They note that real estate data firm ATTOM reported that nearly half of mortgaged homes in the U.S. were “equity rich” in 2022.
The columnist spoke to Rob Cook, vice president for marketing, digital, and analytics for Discover Home Loans about the trend. As he explained it, “Usually one of the motivations for people to move is looking for a bigger, nicer home. With those homes becoming less affordable, demand for remodeling is increasing — along with different ways to finance it.”
Because mortgage rates still remain high, fewer homeowners are looking into mortgage refinancing and instead opting for a home equity line of credit more than ever before. Added Cook, “You can maintain the low interest rate on your primary mortgage by getting a second lien loan and use that equity in your home to finance a project in the home that you currently have.”
If you are looking for a home equity loan or line of credit — the former being a lump sum you pay back in installments and the latter acting like a credit card where you pay back what you borrow over time — experts say to do so now. Analysts believe the Federal Reserve will keep increasing the prime rate for loans throughout 2022.
Though, before making any move, it’s best to make sure not to go overboard, especially because your home value could end up decreasing in the years ahead due to a variety of factors. You should also be sure you are financially capable of paying the loan back.
Because these loans and lines of credit are secured against the collateral in your house, if you aren’t able to pay them back, your lender can put your home into foreclosure. It’s also advised to use this money for your home rather than other purposes, as making investments will only increase its value in the long run.
In order to get a qualified home equity loan or line of credit, Next Advisor notes you must have a good credit score, sufficient income, a low debt-to-income ratio and have at least 15-20% equity in your home (its worth compared to what you owe on your mortgage). It’s also good to know many of these types of loans come with closing costs and fees, and it may require an appraisal service or a longer application time than another kind of credit.
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