A rebounding economy, increases in home values and lower interest rates have again given rise to the popularity of home equity lines of credit (HELOCs), The Wall Street Journal reports.
Previously, mounting foreclosures and a drop in home values forced some lenders to stop originating home equity loans and lines of credit or scale back their offerings.
But now homeowners are taking advantage of lower interest rates, borrowing up to $23.4 billion in home equity lines of credit (HELOCs) in the first quarter — the highest quarterly amount since 2008, WSJ writes.
Borrowers took out more than 230,000 HELOCs in the first quarter, up 9% from a year prior. And the amount of the credit lines also increased: The average credit line in March was $100,207, a 4% increase from the previous year and the highest average since 2008, the article states.
With interest rates averaging 5.01% for HELOCs, many homeowners are seizing the opportunity to fund renovations, cover emergency expenses or pay off other debt.
While tapping into these lines of credit may be beneficial in some cases, homeowners must also be aware that doing so can reduce the home’s equity and present significant risks.
“Perhaps the greatest danger is that a drop in housing prices could leave homeowners owing more money on their properties than they would be able to sell them for in a pinch,” WSJ writes. “Normally, the down payment and any paid-off principal provide a cushion.”
Many lenders are now allowing homeowners to borrow more than their home’s value, WSJ writes, which could put them at risk even if home values drop by a small amount.
In January, for example, Flagstar Bank, a unit of Michigan-based Flagstar Bancorp and the eight-largest U.S. mortgage lender, began allowing borrowers to take out up to 90% of their home’s value with home equity loans or lines of credit, up from 80%.
To read the full Wall Street Journal article, click here.
Written by Emily Study