Home equity loans are booming, and for good reason. Credit-reporting agency Equifax is reporting that home equity loans and lines of credit (HELOCs) were up 20 percent in 2015 from the year prior.
But—don't worry; we're not about to hit another housing market crash like that of 2007. Back then, lending standards were much looser than they are now and stated income loans were an acceptable way to qualify for a loan. Now, these loans do not exist, and borrowers must have a minimum credit score of 620 at the absolute lowest, with the average score ranging in the high 700s, according to Equifax Chief Economist Amy Crew Cutts.
Home prices are still on the rise, too, up roughly 30 percent from the market crash in 2012, according to S&P/Case-Shiller. Coupled with the tight supply of homes currently for sale, many homeowners are turning to home equity loans and HELOCs to remodel their homes instead of purchase a new one.
"This resurgence is fueled by several factors including home value appreciations and a strengthening housing market, which is attracting more borrowers and lenders to an expanding home equity market," said Doug Lebda, founder and CEO of LendingTree. "Consumer confidence and improving equity positions are allowing borrowers to access the equity in their homes."
Consumers are also making better uses out of their home equity loans now than in years' prior. Before, it was common to cash in on your equity to buy luxury items, such as boats, elective surgeries or exotic vacations. Now, homeowners are much more cautious of what they're spending their equity on and are choosing either necessities, such as college expenses, or things that will increase the value of their home, such as a new kitchen or new flooring.
How Much Equity Do You Need to Qualify?
Before the housing crash, consumers could borrow more than 100 percent of their home's value. Now, consumers are typically capped around 80 to 85 percent. Let's say you own a home that's worth $200,000 and you owe $120,000 on your mortgage. 80 percent of $200,000 is $160,000, minus the $120,000 that you owe means you could get a home equity loan or HELOC for roughly $40,000 ($160,000 minus $120,000 equals $40,000).
Home Equity Loan vs HELOC
A home equity loan and a home equity line of credit are terms that may seem interchangeable, but they're actually two entirely different products. A home equity loan is one lump-sum of money given to you with a fixed interest rate and a predetermined payback period, typically 15 years. A home equity line of credit (HELOC), on the other hand, acts similar to a credit card where the borrower is given a line of credit with their home as collateral and only owes interest on the amount that they spend. Home equity loans may be good for one-time expenses, whereas HELOCs are better-suited for ongoing expenses or to have available in case of an emergency.