Some news sites and even past reports claim about HELOCs gaining traction this 2018. To be fair, home equity lines of credit are a perennial favorite among homeowners to get cash out of their equity or simply have standby funds for the rainy day.
Still, it begs the question of what makes 2018 a year for HELOCs as one website would have it. Will there be a higher demand for HELOCs or a higher interest rate on them? Is 2018 all good news or something to be prepared for as well?
The Return of HELOCs
As early as October 2017, TransUnion projected the return of HELOCs. Per the TransUnion study, an estimated 10 million consumers are expected to take out a HELOC between 2018 and 2022.
That’s double the number of home equity lines of credit that were originated between 2012 and 2016.
For 2018 alone, TransUnion projects 1.6 million new HELOC borrowers, an increase of 30% from 2015’s 1.1 million and 2016’s 1.2 million. In 2017, 1.4 million new HELOCs were projected.
The reason behind this projected boom? The rise of homeowners equity which is said to have exceeded its housing boom levels, according to TransUnion SVP Joe Mellman.
In the third quarter of 2017 alone, senior homeowners (age 62 and above) accumulated $121 billion in home equity per NRMLA/Risk Span.
CoreLogic’s Q317 report also recorded equity gains across the U.S. whereby homeowners with a mortgage gained $870.6 billion in home equity – the largest leap seen in the last three years.
Nevertheless, a rise in home equity does not necessarily translate to an increased demand for home equity lines of credit, Mr. Mellman noted. He however believes that the effects of those factors will abate to give way for the return of the HELOC.
Managing a “Perfect Storm”
To balance things out, Greg McBride, chief financial analyst at Bankrate.com predicted rates on home equity lines of credit to bump up 75 basis points in 2018.
He cited these factors align for this perfect storm:
- New tax code that was signed into law in December.
- Low unemployment rate that has remained unchanged from a 17-year low.
- Strong economy with real gross domestic product projected to grow under appropriate economic policies per the Federal Reserve.
Fed rate hikes as supported by economic projects by the Fed. The most recent hike was in December last year but Mr. McBride expects this to be followed by three more hikes in 2018.
The looming rise in rates could very well push homeowners to take out new HELOCs while rates are still manageable. For existing HELOC borrowers, they might do the following as recommended by Mr. McBride:
- Refinance into a fixed-rate home equity.
- Refinance into another HELOC to restart the draw period.
- Ask for a freeze so the rate will remain the same on outstanding balance.
The Case for HELOC
With or without a hype, home equity lines of credit are pretty useful for a homeowner. There are no closing costs and you only pay interest on the sum you borrowed.
Eligible borrowers can tap up to 80% of their home equity via HELOCs. These adjustable-rate loans can be used to:
- Consolidate high-interest-rate debts like credit cards
- Finance a large purchase or project such as home improvement
- Refinance into another HELOC for a lower rate
- Fund a portion of the down payment on a home (piggyback loans)
However you want to use a HELOC, be sure you have made an informed decision. You can seek expert’s opinion on the matter here.