Home Equity Loan Market Trends for 2019
While home equity loans and home equity lines of credit (HELOCs) have not regained their pre-financial-crisis popularity, they have been on the rebound in the past few years. With home prices on the rise, homeowners have more equity to tap to do things such as make home improvements, fund education or consolidate debt.
The fact that the interest paid on home equity loans may be tax deductible under certain conditions makes them even more attractive. But several factors, including the rising interest rate environment, might affect the popularity of home equity loans in 2019.
Home equity trends to watch in 2019
Rising home prices have boosted home equity
Home equity is your home value minus your mortgage balance. So if the value of your home is $300,000 and you owe $150,000, your home equity will be $150,000. That means there are two ways to gain equity in your home: You pay down your mortgage, or your home value increases.
Home values are on the rise nationwide, with the Federal Housing Finance Agency reporting that house prices rose 6.5% from the second quarter of 2017 to the second quarter of 2018. With home value steadily increasing, homeowners are more equity rich and can increasingly tap into that reserve.
“I’d expect to see homeowners continue to tap home equity in greater measure in 2019,” said Daren Blomquist, senior vice president of communications at ATTOM Data Solutions. “Homeowners are staying put longer than ever and prices continue to rise, giving them more equity.”
Variable-rate products have become less attractive
While it’s difficult to accurately predict consumers’ decisions, the fact that rates are on the rise might dampen the appetite for HELOCs. Unlike home equity loans, HELOCs generally have variable interest rates, meaning that when rates go up, payments go up as well.
Rising interest rates make it more costly and risky to borrow using adjustable rates, said Tendayi Kapfidze, chief economist at LendingTree. “So borrowers may opt for more fixed-rate loans.”
In 2019, home equity rates will likely rise in tandem with the Fed funds rate, which could be 0.75 to 1 percentage point higher a year from now, according to Kapfidze.
Borrowers may favor home equity loans over HELOCs
Johnna Camarillo, assistant vice president for equity lending at Navy Federal Credit Union, said she expects these rising interest rates to lead consumers toward the security of fixed-rate home equity loans over the unpredictability of adjustable-rate HELOCs.
“Already, in the last two months, we have seen a switch in the upcoming home equity loan applications,” she said in early November. Previously, home equity loans made up 46% of home equity financing applications at Navy Federal Credit Union, but within the past few months, they’ve jumped to 54% — a trend Camarillo said she expects to continue in 2019.
“People want to switch and go for certainty,” she said. “That way, they know they are locking in a good rate at the beginning of the rising rate environment.”
The home equity borrowing process has seen technological advances
With younger, more technology-savvy homeowners in the market, lenders have been struggling to keep up with the digital processes they crave.
While technological advances may not be dramatic in 2019, “they are definitely coming,” said Craig Martin, director of wealth and lending at J.D. Power.
“We are seeing more players invest in automation of mortgages,” he said. “Many already have their platforms, and now it’s trickling down to the home equity loan market.”
According to Martin, there hasn’t been much of a shift toward automation in the past, because home equity loans are often used by older consumers who own a home and have enough equity to tap. Now that the demographic is becoming more tech-savvy, that demand is on the rise.
Blomquist echoed the sentiment, saying lenders will increasingly need to lean on data- and technology-driven solutions to survive and grow. “We see the most growth in market share in recent years among nonbank lenders who are more open to digitizing the loan origination process with the help of technology, thereby reducing friction in the process,” he said.
But Martin added that while the assumption is that millennials want everything to be “100% digital,” their data show that they also want a personal touch and personal advice and coaching.
How to compare home equity loans
Whether home equity loans will be used for home improvements (the most popular reason for the financing, according to a recent LendingTree study), to consolidate debt or something else, there is a multitude of criteria to take into consideration when deciding which loan is best suited for you.
Home equity loans are also known as second mortgages. The money comes in a lump sum, which you repay over time. Their appeal is in their fixed rates, which make them better suited for big, budgeted projects such as home improvements.
But interest rates are usually higher for home equity loans than the starting rates on HELOCs because you’re trading a lower interest rate in exchange for rate stability. Also, home equity loans often have added fees, including closing costs, that should be taken into consideration.
As for HELOCs, they are similar to credit cards in that they give you access to a set line of credit that you can borrow against, repay and borrow again during the loan’s borrowing period. Their rates and fees are typically lower than those of home equity installment loans. But variable rates make them the less stable option.
One way to circumvent that impediment is to look for lenders who offer HELOCs that carry an option to convert to a fixed-rate loan, Camarillo said.
“This is a great option to lock in a rate and flip from a variable to a fixed rate,” she said, adding that consumers still need to be careful with the fine print and pay attention to the restrictions and fees associated with this option.
Even though we’re in a rising-rate environment, there is still a strong appetite for the home equity loan market. They are still a better option rate-wise for consumers compared to personal loans or credit cards. And while they are nowhere near as popular as they were before the financial crisis and rates are on the rise, they will become more common, Kapfidze said.
But it is important to take into consideration your credit score, ability to repay and financial stability before considering tapping into your home equity.
And as with everything, be sure to do as much research as possible. Compare offers, read the fine print and be on the lookout for hidden fees. “While there are still strong opportunities for equity lending and there is a very strong equity lending market,” Camarillo said, “an informed consumer is the most important piece of the process.”