Why are HELOCs so hot?
According to a new study by Experian, the volume of new Home Equity Lines of Credit (HELOCs) being originated more than doubled over the past five years. The fourth quarter of last year saw $43 billion in new HELOCs hit the marketplace.
HELOCs have been around for many years, and always represent a viable financial tool for homeowners with equity. So if there are always reasons to get a HELOC, why are they particularly hot now? It seems a variety of conditions have combined to contribute to the surge in the popularity of HELOCs.
4 Reasons HELOCs Are Hot
Here are four market conditions that help explain the jump in HELOC activity:
- Mortgage rates are still near record lows. 2016 saw a remarkable summer for mortgage rates. It's not just that they remained so low, but that they were remarkably stable. At one point, 30-year mortgage rates stayed in a tight range between 3.40 percent and 3.50 percent for 11 straight weeks. Low interest rates make HELOCs and other mortgages attractive to homeowners, and that stability makes it easier for consumers to follow through on their plans.
- Rising home prices have beefed up owner equity. The S&P CoreLogic Case-Shiller National Home Price Index has been rising steadily since early 2012, and is now approaching pre-housing crisis levels. The sustained recovery in housing prices has helped American homeowners build equity quickly in recent years. This equity becomes a resource that can be borrowed against with HELOCs or home equity loans when needed.
- Old loans are ripe for refinancing. HELOCs were also very popular during the housing boom of a decade ago, and now many of those loans are reaching their repayment stage. With interest rates so low, it makes sense for many of those borrowers simply to refresh their credit lines by refinancing into new HELOCs.
- Low default rates are giving lenders confidence. Experian reports that just 0.49 percent of all HELOCs, or less than 1 out of every 200, are seriously delinquent in their payments. Loan performance has improved significantly since the Great Recession, and that is a significant factor in making HELOCs more readily available. The more reliably borrowers pay back their loans, the more motivated lenders are to make new loans.
Reasons to Get a HELOC
Given that market conditions are favorable, why should you consider a HELOC? Here are three basic reasons to get a HELOC:
- Low-cost borrowing. Consumers have many credit options available to them, but normally loans that can be secured by equity in a home will carry lower interest rates than personal loans or credit cards. Thus, HELOCs can be a cost-effective form of borrowing both for new expenses or to refinance old debts.
- Multiple needs over time. HELOCs let you access credit as you need it, so if you are planning on having multiple needs for credit in the months or years ahead – say, a series of home improvement projects – it can be more efficient to use a HELOC to access the credit only when those needs come up rather than all at once.
- Flexibility. Future plans are not always clear to people. You may anticipate needs for credit in the years ahead without knowing exactly when those needs will occur or how large they will be. A HELOC gives you the flexibility to deal with that uncertainty.
Home equity credit should never be accessed lightly – your ability to repay should be carefully assessed before you borrow money. When you do have manageable borrowing needs, a HELOC might be the right tool to fit your situation. The rising popularity of HELOCs these days suggests that many other consumers are reaching the same conclusion.