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American mortgage holders are optimistic that equity in their homes is rising, and that’s helping fuel— for better or worse — a huge increase in home equity lending.
Nearly half (46%) of all U.S. homeowners with a mortgage expect their equity will increase in 2016, with a quarter of these optimists expecting it to rise between 6% and 10%, according to a new survey released by nonbank lender loanDepot.com. The same survey found that many owners don’t realize how much the market has already recovered, loanDepot said. Only 57% think their home’s value rose at all during the past three years, and a quarter of that group thinks it rose less than 5%. The Case Shiller 20-city index shows prices rose twice that much, in fact, 10% from November 2013 to November 2015— though home price increases are intensely local, and not everyone in America is enjoying double-digit increases.
Still, more home equity seems to be translating into sharp rises in home equity lending activity. The number of new HELOCs — home equity lines of credit — originated from January to October 2015 was up 11.8% over the same period one year ago, and at the highest level since 2008, according to Equifax.
Meanwhile, the total balance of home equity loans originated from January to October 2015 was $21.9 billion, a 20.1% increase from same time a year ago; and the total number of new home equity loans for subprime borrowers (i.e. those with bad credit scores) was 652,200, an increase of 24.7% and the highest level since 2008.
The findings are consistent with a Credit.com report earlier this month revealing that the number of underwater homeowners — those who owe more on their mortgage than their home is worth — has dropped sharply.
Not surprisingly, there is a split in optimism between those who suffered the downdraft of the 2008-09 housing recession, and those who bought their homes later, loanDepot said.
“Homeowners who bought during the housing boom are regaining equity many thought was lost forever, yet too many are not aware of the equity they have gained or they are unclear about how to determine changes in their equity,” said Bryan Sullivan, chief financial officer of loanDepot, LLC.
Plenty of online tools offer home value estimates, and owners who have been timid to look in recent years might take a glance at such sites — but keep in mind they offer only rough estimates. The true value of a home is only determined when a real buyer shows up ready to write a check.
But banks and other nonbank lenders believe the equity gain story enough to free up funds for home equity loans.
Homeowners often opt for a HELOC to finance overdue home improvements. The Harvard Joint Center for Housing Studies believes a boom in home improvement projects is coming. It projects spending growth for home improvements will accelerate from 4.3% in the first quarter of 2016 to 7.6% in the third quarter. (You can learn more about home equity loans and HELOCS here.)
Another common use for a home equity loan is to pay off credit card debt. But you should be careful of this tactic. Transitioning high-interest credit card debt into low-interest home equity debt can be tempting, and it can help some consumers get out of a big financial hole. But it often fails to solve the underlying problem of too much spending and not enough income. A return to equity shouldn’t mean a return to the kind of home-as-ATM free-spending habits some consumers adopted last decade.
If your credit score is good, a financial institution may even allow you to borrow up to 80% — or even 90% (but at a higher interest rate) of your home’s value. You can check two of your credit scores for free each month on Credit.com.
Image: gpointstudio
December 13, 2023
Mortgages