WASHINGTON (6/2/14)--Home-equity lines of credit, which allow homeowners in need of cash to borrow against the value of their properties, jumped 8% in the first quarter year-over-year, perhaps signaling a revival of a common practice used before the housing bubble burst in 2008.
According to Inside Mortgage Finance, $13 billion of home equity was extended in the first three months of the year--the bulk of which were home-equity lines of credit, or HELOCs--which is the highest mark since 2009 (The Wall Street Journal May 30).
HELOCs differ from home-equity loans in that HELOCs allow borrowers to pull money away from their homes as needed, whereas the loans are packaged in lump sums.
While the recent surge pales in comparison to the $113 billion extended in the third quarter of 2006, rising rates of HELOCs might be a prelude to softer credit conditions and a strengthening housing market.
Climbing average home prices and still historically low mortgage interest rates are likely driving the resurgence.
"We're seeing much more aggressive marketing campaigns (for HELOCs) by banks in locations where home prices have risen," Amy Crews Cutts, Equifax chief economist, told The Wall Street Journal, adding that she expects HELOC originations to continue to gain popularity in the coming months.
Unlike before the recession, however, lenders only appear to be handing out HELOCs to borrowers with upstanding credit, and particularly only in locations where home prices have appreciated, according to Keith Gumbinger, vice president of HSH.com, a mortgage information site (The Wall Street Journal).
When the housing market soared before the bust, consumers looking to remodel homes, buy cars or boats, travel or pay for college tuition often borrowed up to 100% of their home's value, expecting that the price tags on their homes would continue to balloon.
But the recession dashed the hopes of many homeowners' chances of repaying the debt, and subsequently ravaged the bottom lines of the lenders who authorized the loans.
While home-equity loans appear to be once again in vogue, lenders have thus far taken a cautious approach.
"Relative to where they were, lenders are still very conservative," Gumbinger said. "Will the excess of yesterday return? Only time will tell."