Home Equity loans jump – or did they?

This week Equifax announced  New credit for HELOCs increases 21% year over year. New Home Equity loans reached a 6 year high in July.

Mindful that there are a lot of 10 year HELOCs coming due in the next few years my first reaction was one of caution, tending towards concern. After all, a lot of the housing boom was financed by people using the equity in their homes. HELOCs opened between 2004-2008 account for 60 percent of outstanding loans and more than $221 billion in HELOC loans will be due for repayment or refinancing from 2014-2018.

But I read on and learned:
(a) While new loans “jumped” 21% to $66 bn, the total amount of HELOCs outstanding at the end of August was $478 billion, a 5 year low and a 4% decrease over a year ago.
(b) Total HELOC volume is only just over a third of the levels before The Great Recession.

All in all, therefore, it does not appear that new home equity loan levels are a cause for concern, nor are they an indication that we are again all glued to HGTV and borrowing freely to speculate  invest in real estate. I do, however, have some concern as to the impact as the 2004-2008 loans come due.

What is the difference between a Home Equity Loan and a Home Equity Line of Credit?
A HELOC is a line of revolving credit with an adjustable interest rate whereas a home equity loan is a one time lump-sum loan, often with a fixed interest rate. A HELOC can be drawn down as and when needed and bears interest only. A Home Equity Loan, however, is more like a mortgage, with a one time draw down and payments that include Principal.

Put another way, the payments on a HELOC are a lot less than those on a Loan. Hence their popularity with homeowners.(Outstanding HELOCs are $477 bn while outstanding home equity loans are only $125 billion.)

The bad news is that after 10 years of interest only payments borrowers will have to refinance, pay off the loan or start making Principal payments over a shorter time frame. (I heard of one recently which converted into a 6 year mortgage.Ouch!).

Equifax made this comment about the classes of 2004-2008: “The financial circumstances of borrowers and the value of properties against which these lines are held may have deteriorated.” NSS!

If you  – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 617.834.8205 or Andrew.Oliver@SothebysRealty.com.

Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC.  Each Office Is Independently Owned and Operated

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