According to Equifax's latest National Consumer Credit Trends Report, the total balance for revolving home equity lines of credit (HELOCs) from January to July 2014 has reached a six-year high of $65.9 billion. That represents a year-over-year increase of 21.4% during the same time period.
Rising Housing Market Returns Equity to Homeowners
HELOCs have recently been rising in popularity, due to conditions in the housing and financial markets. Rising house prices over the last few years have helped homeowners to regain equity that they may have previously lost in their homes during the housing crash.
Uses for Home Equity Loans
Now that homeowners have equity, they can access it for many purposes, ranging from remodeling their homes, paying for tuition, or buying a new car, to taking an exotic vacation if they choose. In the past, some homeowners got tax breaks from the interest paid on their home equity loans, but the Tax Cuts and Jobs Act eliminated this deduction in 2018.
Consumers should exercise caution when tapping into home equity, since the length of the payback period may be much longer than that on a typical loan you would get for some of these purchases.
Rising Interest Rates Make Cash-Out Refinancing Unattractive
Recently, the financial markets have created some of the lowest interest rates on mortgages we have seen in decades. Unfortunately, interest rates have slowly begun to rise off their recent lows.
People no longer want to access their equity through cash out refinances, since most people locked in the interest on their mortgages at rates that are lower than what they could refinance at today.
When interest rates were declining, it made sense for consumers to perform a cash-out refinance, both to lock in a lower interest rate on their mortgage and to withdraw cash from their equity at the same time. However, in today's rising interest rate environment, HELOCs give the option of keeping your mortgage locked in at your low interest rate while still giving you access to the equity in your home.
Why Installment Home Equity Loans Are Less Popular
Ideally, consumers that know how much cash they need would prefer a fixed-rate installment home equity loan rather than a floating rate HELOC. The problem with installment home equity loans is that banks do not offer as many deals on these products, due to the higher compliance burden they face.
That leads many consumers to choose variable-rate HELOCs that have rates that are more attractive in the immediate future, but may eventually be more expensive as interest rates rise.
HELOCs Have Not Returned to Pre-Crisis Levels
HELOCs, among other factors, are what caused many homeowners to end up with negative equity when the housing prices crashed. Luckily, Amy Crew Cutts, Equifax's chief economist, stated that, "While the recent increases in HELOC lending seem large, the total volume of HELOC lending is just over a third of what it was prior to the financial crisis."
This is a positive sign that we have not yet returned to the same patterns of over-leveraging our homes. However, we must keep in mind that many homeowners are still underwater from the first housing crisis and do not even have equity available to tap. Those that do have available equity should think twice before accessing their equity to pay for unnecessary upgrades or other expenses.
Will We Have Another Housing Crisis with Underwater Homes?
Will the returning popularity of HELOCs cause another housing crisis in which homeowners end up underwater on their homes again? Only time will tell. These loans can be used responsibly. The question is, will we learn from our past mistakes or forget history and fall into the same traps again?