If you’ve got it, tap it. That appears to be the strategy for growing numbers of owners across the country who have begun taking out home equity credit lines at a rapidly accelerating pace.
New data provided by national credit bureau Experian and researchers at the Oliver Wyman consulting organization suggest that a rebound boom in equity-tapping is underway. Owners have pulled out $120 billion in new home equity credit lines in the past 12 months, a 27 percent increase in volume over the year earlier.
In some states, new home equity line borrowing is exploding — up 169 percent in Wyoming, 85 percent in Oklahoma, 79 percent in Arizona, 53 percent in Florida and 52 percent in Ohio. Dollar volumes of new lines are highest in areas with the most expensive housing, especially along the West Coast and the Northeast. In California alone, nearly $6 billion in new equity credit lines were originated in the past 12 months, according to researchers.
In many cases these are not small lines, either. For owners with high credit scores, the average amount that can be drawn down on new lines is just under $120,000. For those with good but not perfect credit, dollar limits average in the $40,000 to $60,000 range. But banks are lending to applicants with poor credit as well. New credit lines to “deep subprime” owners — those with the worst credit histories — topped out above $30,000 in the second quarter.
Home equity credit lines — commonly referred to as HELOCs — typically are second mortgages. Unlike standard second loans, HELOCs are structured as open lines of credit that the borrowers can access up to a stated limit. Lines are often used to pay for home renovations, college tuition and other recurring big-ticket expenses.
HELOCs are particularly attractive because of their low interest rates and repayment flexibility. Current rates for owners with good credit run anywhere from the mid-3 percent range to 4 percent. Repayment terms typically are interest-only for an initial period of years after which payments “reset” to include principal plus interest.
Most HELOCs are made by banks. As long as the total mortgage debt secured by a house — the combination of the first mortgage plus the maximum HELOC amount — does not exceed 80 percent, banks believe they have a margin of safety should home values decline. But some banks and credit unions recently have begun pushing the combined debt limit to 90 percent, provided applicants’ credit scores and documented incomes are high.
The rapid increase in new credit lines is the direct result of the significant gains in home prices in most parts of the country during the past year, researchers say. According to Federal Reserve estimates, owners’ equity holdings jumped by $2.15 trillion between the first quarter of 2013 and the first quarter of this year.
But here’s a key question: Despite the big jumps in home prices and equity holdings, is the boom in HELOCs beginning to look like a bubble? Is it a good thing — or an omen — when new HELOC volumes soar in a year by 79 percent in Arizona and 52 percent in Florida? Both states were early leaders in the mortgage credit crazes that preceded the bust. Are we heading for a repeat?
Alan Ikemura, a senior product manager at Experian Decision Sciences, doesn’t think so. “HELOC (originations) are not a bubble taking shape,” he says, because banks’ underwriting rules and practices are much more stringent. Plus consumers themselves are behaving more prudently with the credit they’re granted.
For example, he said, HELOC borrowers with excellent credit are only pulling down about 30 percent of the high limits they are permitted. More important: Borrowers at all credit levels are not defaulting on their HELOCs. Delinquencies of 30 days or more on credit lines have declined over the past year and now represent just 1.71 percent of outstanding balances.
So for now, the equity boom apparently is no bubble. But keep this in mind: In many markets, price increases have cooled off considerably in recent months, meaning equity growth has slowed. If you plan to jump on the HELOC bandwagon and borrow against your equity, play it smart. Don’t hock too much of what you believe to be your equity. You’re going to have to pay it back some day and that equity cushion might not be as big as you thought.
Kenneth Harney is executive director of the National Real Estate Development Center.