The Rise in Popularity of Home Equity Lines of Credit (HELOCs)

The Rise in Popularity of Home Equity Lines of Credit

The real estate market has been in a state of flux over the past few years, and with the current state of the economy, homeowners who do not want to sell their homes are looking for ways to improve their properties without having to refinance their mortgage at a higher rate. This has led to the rise in popularity of home equity lines of credit (HELOCs) once again (remember the mid-2000s, anyone?).  For those of you who aren’t familiar with them, HELOCs are revolving lines of credit secured by one’s home that allows homeowners to tap into the equity in their homes to make improvements.

One of the main reasons why HELOCs have become so popular again is that current homeowners do not want to refinance their 30-year fixed-rate mortgage at 6.25%. Instead, they are opting for a smaller-balance HELOC, which allows them to make improvements to their property while still maintaining their existing mortgage rate. Homeowners are also choosing to stay in their homes and make improvements rather than list their homes, as interest rates are much higher than a few years ago.

HELOCs typically have a draw period of 10 years and a repayment period of 20 years, making them a popular choice for homeowners who want to make improvements over an extended period. Unlike fixed-rate, lump-sum second-lien home-equity loans, HELOCs carry variable interest rates, usually prime plus 1.5 to 2 points.  While it may not be cheap money, HELOCs are more often taken out on smaller balances of $50,000 to $150,000, making it more attractive to homeowners, especially those who are not interested in giving up their low 3% mortgages by refinancing to pull out equity at a new rate that is twice as high today.  Another benefit to HELOCs is that the interest on these loans is tax deductible if the funds are used for approved home renovations.

Although they were in decline like traditional loans were in the fourth quarter of 2022, HELOCs still comprised 20.7% of all fourth-quarter 2022 loans, nearly five times the 4.6% level from the first quarter of 2021, according to a recent market assessment by ATTOM. This is due to the solid base of home equity that now exists since the beginning of the pandemic, as well as an increase in demand by borrowers to tap into that equity. Given the recent rise in demand for HELOCs, nonbanks, traditional depository lenders, and fintech firms are all ramping up efforts and product lines to meet this demand.

If you have questions about HELOCs, the housing market, or real estate in general, feel free to contact me anytime. I would be happy to answer your real estate-related questions and put you in touch with lenders who can accommodate your needs.  Have a great week, everyone!

Jeff Hernandez, Esq.
The Connie Colla Group at RETSY
(602) 550-1114
jeff@conniecollagroup.com

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