Equity credit lines are accelerating, but beware of betting the house on it.
Byline: Kenneth R. Harney
WASHINGTON -- 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 an accelerating pace.
New data from national credit bureau Experian and researchers at the Oliver Wyman consulting organization suggest 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. 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. 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 structured as open lines of credit up to a stated limit. Lines are often used to pay for home renovations, college tuition and other recurring big expenses. HELOCs are attractive because of their low interest rates and repayment flexibility.
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. According to Federal Reserve estimates, owners' equity holdings jumped by $2.15 trillion from the first quarter of 2013 and the first quarter 2014.
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?
Alan Ikemura, a senior product manager at Experian Decision Sciences, says, "HELOC (originations) are not a bubble taking shape,'' because banks' underwriting rules and practices are much more stringent. Plus consumers are behaving more prudently with the credit they're granted. Delinquencies of 30 days or more on credit lines have declined over the past year and represent 1.71 percent of outstanding balances.
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 and that equity cushion might not be as big as you thought.
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|Author:||Harney, Kenneth R.|
|Publication:||Telegram & Gazette (Worcester, MA)|
|Date:||Aug 31, 2014|
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