While Americans are enjoying rising equity in their homes, fewer are actually borrowing against that equity. The number of home equity lines of credit opened in the first quarter of 2017 was down 14 percent from the previous quarter and 22 percent from the first quarter of 2016, according to data from Attom Data Solutions, analyzed by RealtyTrac.
Attom Data Solutions also found that the volume of money borrowed in home equity lines of credit, or HELOCs, was at its lowest level in three years.
HELOCs became popular during the real estate boom that peaked in 2006, as people used their rising home equity to pay for cars, vacations, tuition and other nonhousing needs, as well as home improvements. With a line of credit, the lender approves a maximum amount, and the homeowner can use everything at once, chunks of money as needed or nothing at all, holding the credit line for emergencies. Payments are based upon how much is borrowed.
“Back in the day, people were using their homes like a piggy bank,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and a mortgage professional in the San Francisco Bay Area. “People did it because they had the equity, and they thought it was a good idea.”
For many people, the housing market crash erased a big chunk of their equity, making it impossible to get a home equity line. As homes regained value, the number of homeowners seeking HELOCs grew, but homeowners now seem to be pulling back, whether by desire or circumstance.
“We’re in a rising-rate environment,” says Mary Jane Corzel, senior vice president of Bryn Mawr Trust’s Retail Credit Center. The interest rate for most HELOCs is variable, based on an index such as the prime interest rate plus an additional percentage, which varies by loan. As the prime interest rate rises, from 3.5 percent at the end of last year to 4.25 percent this week, interest rates for HELOCs are rising, too.
While many people still tap the equity in their homes, often to finance renovations that will hopefully add even more value to their home, a variety of factors are contributing to the drop in the number of HELOCs.
“I think that consumers are more reluctant partly because of the crash and partly because they’re getting older,” Fleming says. Older homeowners usually seek to pay off their debts before retirement.
A HELOC isn’t always the best way to borrow money. The credit lines work best for people who have a plan to pay off the debt quickly or for someone who has irregular income and can pay off what he or she borrows during the higher-earning periods. Whether it’s the best choice for home improvements depends on how fast you can pay it off. If you will need years, a home equity loan, which has a fixed rate, may be a better choice, Corzel says.
Some people request a line of credit before they need it, with the idea that it will serve as an emergency fund. “It’s a good thing for emergency funds … as long as you’re disciplined enough to pay it off before the rate goes up,” Fleming says. “Always have a plan to get it paid off quickly.”
But the truth is even those who want a home equity line of credit may not be able to get one. Here are four reasons you might not qualify for a home equity line of credit:
You don’t earn enough money. No matter how much equity you have in your home, lenders want to see that you can pay off any loan you take out. To get a home equity line of credit, you will have to provide that your income is adequate, and the lender will verify your claims.
You have too many debts. Lenders will rarely approve a loan for someone who is spending more than 43 percent of income on debt, including mortgages, car payments, credit card payments and student loan debt. Previously, it was easier to wrap all your credit card debt into a HELOC because lenders wouldn’t count what you owed if you agreed to cancel the cards. That’s no longer the case, Fleming says. To qualify for the consolidation loan, you’ll need to be able to pay both the existing payments and the HELOC payment. “People who run up their credit cards tend to do it again and again and again,” Fleming says.
Your home value isn’t high enough. While home values have risen, 9.7 percent of homes are still seriously underwater, with mortgages exceeding 125 percent of their value, according to Attom data. Using different data, real estate information company Zillow found that 10.7 percent of American homes with mortgages were underwater, and 25 percent of Americans with mortgages had less than 20 percent equity in their homes. Most banks will lend up to 85 percent of your home’s value, and a few may go as high as 90 percent, but the 100-percent-or-higher equity loans are gone. The value of your home will be determined by an appraiser chosen by the lender. “Values, although they’ve come back, people are still under the impression that their home is worth much more than it is,” Corzel says.
Your credit score isn’t high enough. Lenders are requiring higher credit scores for HELOCs, with the best rate going to those with top-tier scores. “Anything under 680, you’re probably not going to qualify,” Corzel says. Plus, even if you secure a HELOC, a low credit score can impact your interest rate.