The comeback in home values means more people can tap into quick cash through home equity loans to pay for college, credit card debt and yes, even to redo the driveway.
Jo and Bronce Click of Dearborn Heights, Mich., took out a $12,000 home equity line of credit about two weeks ago specifically to pay for a driveway that’s estimated to cost about $7,000. She obtained the loan through her credit union at a rate of 5.25 percent – or 200 basis points plus the prime rate, now at 3.25 percent.
“It seemed like the logical option versus using a credit card. The interest rate on a credit card is ridiculous,” said Jo Click, a graphic designer in the marketing department at Wayne State University.
The Clicks are on the front end of a rising trend in home equity lending.
Community banks, credit unions and major banks have shown renewed interest in making the loans and offering lines of credit, as home values climb in many markets and homeowners add to their equity or peek their heads above water for the first time in several years.
Originations of home equity loans exploded in the second quarter, with a 30 percent plus increase compared with the first quarter, according to Experian, a major credit reporting agency. Experian reported that $29.4 billion in home equity lines of credit were originated in April, May and June – up from $22.1 billion for the first three months of the year.
“This points to the improved equity position for many consumers because they now have equity in their homes due to price increases,” said Alan Ikemura, senior product manager and business consultant for Experian.
Mark Zandi, chief economist for Moody’s Analytics, said Federal Reserve data show homeowners’ equity nationwide up $2.6 trillion, or by 40 percent through March compared with the bottom during the second quarter of 2011. Total homeowners’ equity was $9.1 trillion in the first quarter of 2013.
“The increase is driven both by rising house prices, but also mortgage defaults, which reduces the amount of debt outstanding,” Zandi said.
Some say the upswing in home equity lending is in the early stages. The volume remained about flat for the first six months of 2013 compared with the same time last year, according to Guy Cecala, publisher of Inside Mortgage Finance in Maryland. A bigger rebound could be in 2014, he said.
“Everyone’s gearing up,” Cecala said. “They’re starting to move to make new loans.”
Cecala said the jury’s still out as to how quickly the rebound will be in the loan volume. He noted that back in the housing boom in 2006, lenders saw $430 billion in volume in new home equity lines and home equity loans.
Click said she also took the loan because she’s confident about her job and her husband’s job at Ford. They bought their home out of a foreclosure in November 2008, so they didn’t pay top dollar, and they have plenty of equity. They’d like to tap into the equity line to do other projects over time, maybe updating the kitchen or adding a privacy fence.
She feels somewhat more confident about the housing market, even though it’s a mixed bag. She sees foreclosures still in Dearborn Heights, but at the same time she knows some people can’t even find a home to buy in some popular areas.
“I’ve seen glimmers of hope,” Click said.
Consumers who want to borrow against the house need to understand that rules have changed and a few more chores are required to qualify for that loan. Lending standards are tighter than the go-go years. Consumers can save money by shopping around for the best rates on the Internet and with local small lenders who may offer even more competitive rates.
The average rate on a home equity loan is 6.14 percent. The average rate on a home equity line of credit is 4.99 percent, according to Bankrate.com.
The trick, as always, is to have enough equity in the house.
Take a home valued at $100,000 with a mortgage of $70,000. The homeowner would have $30,000 in equity, but forget about trying to borrow $25,000 or $30,000. In many cases, the homeowner would only be able to borrow $10,000 through a home equity loan.
Many lenders want the homeowner to retain 20 percent equity in the house even after taking out a home equity loan or line of credit.
“The lender is not lending every last nickel of property value,” said Greg McBride, senior analyst for Bankrate.com.
During the boom, it was possible to borrow 80 percent of the home’s value on the first mortgage and then borrow the other 20 percent on a home equity product. But now it’s going to be hard to borrow more than 80 percent of the value of your home, including on the first mortgage.
Expect some sort of appraisal on the home. The time frame for obtaining the home equity loan can range from about two weeks to roughly 30 days.
Homeowners generally need a credit score of 720 or higher. They’ll need to verify employment, offer proof of income and shop harder to find a home equity loan for $10,000.
Some lenders no longer offer small home equity loans or lines, either.
Discover Financial Services’ new home equity loans, for example, range from $25,000 to $100,000.
Bank of America’s minimum for a home equity loan is $25,000 as well.
Wells Fargo, one of the major players, said it offers home equity loans with a minimum loan amount of $20,000.
A home equity loan can help consumers with a “life event,” such as taking on a home improvement project or even consolidating higher-cost credit card debt to get out of debt.
For any of these loans to work, a homeowner cannot owe more on the house already than the house is worth.
Kelly Kockos, senior vice president and home equity product manager for Wells Fargo, said qualifications for getting a home equity loan are more stringent today than they were in the past. Homeowners need to verify their income and provide documents to validate their financial profile.
Some steps closely resemble the process and requirements in getting a first mortgage.