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LendingTree Reveals How Your Neighbors Are Making the Most of Increasing Home Prices

New LendingTree study shows the top uses of home equity loans by city.

It’s been a decade since the financial crisis led to a precipitous decline in home prices. Home values continued to decline all the way through 2012 until, fortunately, an upswing began. Since then, home prices have been steadily increasing and have now surpassed the pre-financial crisis highs. While this poses an obvious challenge for those looking to purchase homes, those who own homes are benefiting from an increase in their housing wealth. And many homeowners are increasingly utilizing some of their growing home equity to extract cash for other expenses.

It’s important to note that this new wave of home equity lending is far different from the equity extraction that occurred prior to the financial crisis. Lending standards are much more stringent today. For example, most home equity borrowers today have far higher credit scores and borrow less of the accumulated appreciation in their home.

Responsible home equity borrowing can be a valuable source of funds for life events. Because these loans are secured by an asset, the borrower’s home, they tend to offer lower rates than more expensive forms of borrowing, such as personal loans or credit cards. And there’s a tax benefit — homeowners can deduct the interest paid on HELs up to certain amounts ($750,000 for a married couple or $375,000 for an individual) so long as they use them to buy, build or make substantial improvements to their home.

In a new study, LendingTree assessed home equity loan requests since the start of 2018 to reveal the primary reasons borrowers are utilizing the funds. We compared our data across cities to find regional biases in how home equity loans are used. We also provide other metrics including loan size, LTV and the age of the borrowers.
Our data tracks six uses for home equity loans — home improvement, debt consolidation, retirement income, investment property, emergency funds and other uses.

Key findings:

  • Home improvement tops the list of uses for home equity loans. The most common use was home improvement, at 43% of applications.
  • Real estate investors borrow the most. Borrowers who were looking to invest in another property had the highest property values and loan amounts requested. For property investments, borrowers requested an average of $103,625.
  • For non-property investments, which likely include small businesses, borrowers requested $80,241.
  • Just over 1% of requests were to fund retirement. Not surprisingly, this cohort had the highest average age of 63 — 12 years above the next highest average age.
  • A small share accessed their home equity for emergency expenses. This group had the lowest loan amount requested of $35,747 and also kept their LTV low at 51%.
  • Debt consolidators push the limits on LTV. Borrowers looking to consolidate debt had the highest LTV of 74%.

Top cities for home improvement

#1 Cleveland
Share of home equity loans: 50%
Median loan amount: $30,000

#2 Kansas City, Mo.
Share of home equity loans: 49%
Median loan amount: $30,000

#3 Boston
Share of home equity loans: 49%
Median loan amount: $50,000

 

Top cities for debt consolidation

#1 Raleigh, N.C.
Share of home equity loans: 48%
Median loan amount: $30,000

#2 Minneapolis
Share of home equity loans: 47%
Median loan amount: $30,000

#3 Las Vegas, N.V.
Share of home equity loans: 47%
Median loan amount: $35,000

 

Top cities for other investment purposes

#1 San Jose, Calif.
Share of home equity loans: 15%
Median loan amount: $160,000

#2 Miami
Share of home equity loans: 12%
Median loan amount: $82,500

#3 Austin, Texas
Share of home equity loans: 11%
Median loan amount: $85,000

Top cities for retirement

#1 Cape Coral, Fla
Share of home equity loans: 5.1%
Median loan amount: $50,000

#2 Daytona Beach, Fla
Share of home equity loans: 3.3%
Median loan amount: $50,000

#3 Charleston, S.C.
Share of home equity loans: 2.5%
Median loan amount: $50,000

 

Top cities for investment property

#1 San Jose, Calif.
Share of home equity loans: 1.2%
Median loan amount: $300,000

#2 Raleigh, N.C.
Share of home equity loans: 0.8%
Median loan amount: $75,000

#3 Miami
Share of home equity loans: 0.7%
Median loan amount: $65,000

 

Top cities for emergency expense

#1 St. Louis
Share of home equity loans: 0.9%
Median loan amount: $25,000

#2 San Francisco
Share of home equity loans: 0.6%
Median loan amount: $35,000

#3 Columbus, Ohio
Share of home equity loans: 0.6%
Median loan amount: $22,500

Cities ranked by share of applications for different home equity uses

 

How borrowers can tap the equity in their home

There are three primary ways to access the equity built up in the home:

#1 Home equity loan: This a lump-sum loan based on the equity available in your home. The monthly payments are fixed as is the interest rate. As we have reported, interest paid on home equity loans and HELOCs is still tax deductible so long as the funds are used to substantially improve the home in some way or buy or build a home. So long as you meet that criteria, you can deduct interest paid on debt up to $750,000 (for married couples) or $375,000 (individuals).

#2 Home equity line of credit (HELOC): This is similar to a credit card, with the amount available to borrow dictated by the equity in your home. You can borrow money and pay it down as needed, though you will have a minimum due once you start to borrow. The payments vary with the amount outstanding and the interest rate can be variable as well.

#3 Cash-out refinance: This replaces a current mortgage with a new one of a higher balance with the borrower receiving the difference in cash. The cash-out refinance is a first-lien mortgage, meaning it will have a lower rate than a HELOC or home equity loan. A cash-out refinance will be eligible for an interest tax deduction up to a balance of $750,000, so long as the funds were used to build or substantially improve the home. A disadvantage to consider is that the closing costs will be larger as the loan amount is typically greater than a HELOC or home equity loan.

Borrowers should educate themselves on these three loan types and select the one best for their circumstances. The table below compares the three options in more detail.

Cash-Out Refi vs. HELOC vs. Home Equity Loan
Cash-Out Refinance HELOC Home Equity Loan
Loan Term You can refinance your home in any loan term up to 30 years. Loan terms for HELOCs can vary. However, many last for up to 20 years. Home equity loans can range from 5-20 years.
Borrowing limits You can usually borrow up to 80 percent of your home’s value, although lender requirements vary. The Federal Trade Commission (FTC) reports you may be able to borrow up to 85 percent of your home’s value (in total) depending on your creditworthiness. Some lenders may let you borrow up to 90 or 95 percent of your home’s value across your first mortgage and home equity loan.
How long it takes to get the money You may receive a lump sum of money once your new home loan closes. The loan process can take a few weeks to a few months. You get access to a line of credit once your HELOC closes with the bank. Withdraw cash as needed. The loan process can take a few weeks to a few months. You usually get a lump sum payout when your home equity loan closes, although not all home equity loans fund right away. The loan process can take a few weeks to a few months.
Credit score You typically need a good FICO score (670+) to qualify, although you may qualify for an FHA cash-out refinance if you have a lower credit score. You typically need a good credit score (670+) to qualify for a HELOC with the best rates and terms. You may qualify for a HELOC with a FICO score of 620 or more, however. Lender requirements vary. You typically need a good credit score (670+) to qualify for a home equity loan with the best rates and terms. However, lender requirements vary.
Equity rules You typically need at least 20 percent equity in your home after your cash-out refinance closes. Most lenders allow you to borrow up to 85 percent of your home’s value including both your first mortgage and a HELOC. You may be able to borrow up to 95 percent of your home’s value across a first mortgage and home equity loan, although lender requirements vary.
Interest Rates Fixed or variable (See current mortgage rates in your area) Variable (See current HELOC rates in your area) Fixed (See current home equity loan rates in your area)
Closing Costs Closing costs are typically hefty for a cash-out refinance since you’re getting an entirely new mortgage. Costs can include, but aren’t limited to, appraisal fee, attorney and title company fees, credit report fee, discount points, inspection fee, loan origination fee, title insurance fee, title search fee and recording fees. These costs can add up to 2-4 percent of the home’s purchase price. HELOC closing costs can include an application fee, title search, appraisal, attorneys’ fees and points. They are typically 2 – 5 percent of the loan. Closing costs typically cost 2- 5 percent of the cost of the loan.
Risk Level Risk is low, provided you can afford to repay your new home loan. Keep in mind, however, that since your home is still used as collateral, you can lose your home if you stop making payments. Risk is fairly low if you can afford to make monthly payments. However, you put your home at risk any time you use it as collateral. Risk is fairly low, provided you can make monthly payments. However, you put your home at risk any time you use it as collateral.
 

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