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To HELOC and Back: Home Equity Lines of Credit Regain Popularity

6 min read

Once upon a time, before the financial crisis of 2008, a helpful creature called the HELOC roamed the financial services realm, offering a seemingly magical way for homeowners to unlock some of their houses’ value.

Now, after seeming to vanish for several years, they’re back from near extinction and ready to roar as home equity totals rebound nationwide.

“When the mortgage bubble happened in 2008 people got scared of losing their homes, so home equity lending pretty much dried up,” said Terry Vick, executive vice president and chief lending officer of Arkansas Federal Credit Union in Jacksonville.

“But as the economy started doing better, people started feeling more comfortable, and ready to start making home improvements or consolidating debt.”

For example, Vick said that in 2014, the credit union originated 224 HELOCs worth just over $9 million, far fewer than during the housing boom of the mid-2000s. But that number has risen each of the past four years, and last year Arkansas Federal originated 555 HELOCs worth nearly $22 million. The credit union currently has 1,815 HELOCs totaling $47 million.

And those numbers are in line with national trends, according to a late 2017 study by TransUnion LLC. Lenders nationwide originated 4.9 million HELOCs in 2005, when the value of home equity in the U.S. stood at $13.3 trillion. Then HELOCs fell off a cliff to just 600,000 in 2011, the low point in the wake of the Great Recession, when equity in American homes had slipped to $6.3 trillion.

By 2018, with national home equity approaching $15 trillion, more than 1.5 million HELOCs were originated, up from 1.2 million in 2016. TransUnion expects them to total 10 million over the next five years, more than double the 4.8 million from 2012-2016.

HELOC Production at Arkansas Federal Credit Union

  Lines Total Amount Average Amount
2018 555 $21,512,954 $38,762
2017 441 $15,452,372 $35,039
2016 406 $16,601,600 $40,890
2015 321 $13,660,610 $42,556
2014 224 $9,052,169 $40,411

‘Borrower in Control’
The HELOC’s main advantage over a fixed-term home equity loan or a second mortgage is the line of credit itself, Vick said. “Borrowers can use the line of credit as needed, pay it down and re-borrow against their line for future needs. It puts the borrower in control of their loan. … It also saves them time,” freeing them from applying for a new loan each time a new need arises.

Both Vick and Asa Cottrell, senior vice president and sales manager at Arvest Bank in northeast, central and southwest Arkansas, expect home equity lines to keep surging.

“A good economy gives people more confidence, so they’re out purchasing boats and cars and things like that, and a line of credit is an option to pay for those types of things,” Cottrell said. “I don’t have Arvest-specific data, but we absolutely see far more activity in these lines than we did during the crisis.”

Vick said that as interest rates on 30-year mortgages have ticked up recently to near 4.5 percent, HELOC inquiries have surged.

“A lot of interest has built particularly over the last year as mortgage rates have actually increased,” he said. “Home equity loans and lines of credit have become more popular for people staying in their homes and remodeling, because that’s often cheaper than going out and buying a new home with those features that they’re looking for.”

A typical home equity line of credit might have an interest rate that’s three-quarters of a percent to 1.5 percentage points above the current mortgage interest rate, depending on individual credit ratings, Vick said. “One thing I love about home equity lending is that there are so many things that you can do with it. It can really help a member out when other loans are a little more difficult.”

According to TransUnion’s research on types of HELOC borrowers, about 30 percent take out the lines for debt consolidation, rolling up balances from other credit products, usually at a lower interest rate.

“HELOCs can have a variable or a fixed rate depending on what the lender offers,” Vick said, speaking from AFCU’s offices just a hundred yards or so from the main gate of Little Rock Air Force Base.

“At Arkansas Federal, we offer both a variable rate — tied to the WSJ Prime Index — and a fixed-rate HELOC,” Vick said. “Rates are a little better on the variable rate product; however, the borrower also takes a risk in the rate increasing in that it’s tied to the index.”

Other top uses for HELOC money across the nation include paying for large expenses like home renovations, refinancing an existing HELOC to get a better rate, peace of mind from having an undrawn line of credit for a rainy day, and in piggybacking with a mortgage origination as part of the down payment, a tactic that is less common in Arkansas.

The size of home equity lines at AFCU has decreased a bit, from an average $42,556 in 2015 to $38,762 last year, but the difference isn’t seen as statistically significant.

Asa Cottrell

Cottrell, a 24-year veteran at Arvest, said that borrowers’ reasons for seeking a home equity line vary widely. “It isn’t data that we necessarily have to verify, but we always spend some time talking to customers about what their goals are,” he said. The idea is to make sure the lending product is the best solution for customers.

“Anecdotally, I’d say the home equity line of credit is often used for a car, or a boat, or for remodeling the existing house,” Cottrell said. “Some use it to pay for college tuition.”

The recent doubling of the standard deduction allowed in computing federal income taxes could hinder the appeal of HELOCs somewhat because while the interest paid will still be deductible, fewer taxpayers will be itemizing their deductions.

Borrowers needing money for a very short term might well avoid HELOCs, Cottrell added, but “a majority of the time a HELOC is going to allow a larger line of credit than a credit card or a personal line of credit would. A personal line is typically a percentage of your income, where the HELOC is obviously tied to the equity in your home. We often talk to people considering using a credit card for a big purchase; the HELOC typically will have a smaller interest rate.”

HELOC Originations Nationwide
(In millions)

2019-2022* 8.4
2018* 1.6
2017* 1.4
2016 1.2
2015 1.1
2014 1.0
2013 0.8
2012 0.7

*Includes projections
Source: TransUnion HELOC Study, 2017

Potential Market Vast
Vick said that HELOC interest rates are slightly higher than rates on traditional mortgages because of “the inherent risk of taking a second lien on the real estate and even lending more funds based on the value.” For example, in conventional real estate lending, borrowers can get up to 80 percent of the value of their home. Arkansas Federal “will lend up to 95 percent of the home value for a HELOC. Again, because you are lending up to most of the value of the home, the risk is greater for a lender and priced accordingly.”

After the financial crisis, many lenders noted the decreased interest in home equity lines and let marketing of those products fall by the wayside. A study last year by J.D. Power & Associates found that few HELOC borrowers are proactively solicited, and that among millennials, 94 percent initiated their HELOC search without encountering any marketing by lenders. Nearly two-thirds reported some level of concern about taking out a line of credit, likely a hangover effect from fears spawned by the financial meltdown.

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J.D. Power recommends that lenders tailor products for a better customer experience, and then market those products aggressively. Vick said Arkansas Federal markets its home equity products in the first and second quarter of each year. This year’s push will be in March or April, he said. Cottrell said Arvest “absolutely” markets its home equity products, “just as we do all the other products and services.”

TransUnion’s study found that as many as two-thirds of homeowners could be eligible for a home equity line of credit, and that their credit scores indicate low risk. “This amounts to approximately 65 million potential borrowers who meet current eligibility requirements,” said Joe Mellman, TransUnion’s senior vice president and mortgage line of business leader.

Mellman said that for years, borrowers had reasons to be wary of credit lines. “But we believe those effects have and will continue to abate, allowing for a resurgence of this compelling credit product.”

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