The importance of HELOC

As home values start to increase, homeowners are finding equity to borrow against and banks are cautiously beginning to provide equity loans.

Bank of America recently reported a 75% increase in home-equity loan originations and in extensions of lines of credit in the first quarter of this year compared with 2013. Bank of America offers fixed-rate equity loans and a variable-rate home equity line of credit which is also known as HELOC.

Real estate analysts believe equity lending will continue to grow this year because of increasing home values, improving consumer confidence and mounting home improvements postponed by the economic downturn.

Homeowners are more interested in HELOCs than equity loans as they can draw on the line of credit as needed over time.

During the economic peak, HELOCs were easy to get, but many borrowers of these loans were unprepared for the escalation in payments once the 10-year interest-only period comes to an end.

Borrowers who can’t manage the payments and don’t qualify for another line of credit may seek a loan modification.

Homeowners who refinanced their mortgages when interest rates were less than 4% may wish to borrow on their equity and upgrade their existing home. However, these people may choose to move to another home that better meets their needs.

Interest rates for equity loans are also higher than current rates on first mortgages. The average interest rate on equity loans is just below 6%. HELOCs, which typically have a variable rate based on the prime rate, have an average interest rate of 5%.

An representative reports that banks won’t allow homeowners to borrow more than 80% of the value of their home. Also, many homeowners do not have sufficient equity to qualify for a loan. Some banks limit the maximum amount of an equity loan and typically don’t provide a loan unless the homeowner has a FICO score in the high 700s.

According to RealtyTrac, 17% of residential properties had mortgages that were 25% more than the home’s value. Others (16%) have between 10% negative equity and 10% positive equity.

RealtyTrac reports foreclosure filings decreased 1% over the previous month. However, bank repossessions increased 4% that same month.

It was also reported the following states had the largest year-over-year increases in bank repossessions: New York (142% increase), Oregon (91% increase), New Jersey (58% increase), Illinois (55% increase), Indiana (52% increase), Maryland (45% increase), Connecticut (44% increase), California (27% increase), and Nevada (15% increase).

The increase in bank repossessions in these markets is attributed to the working through of the final remaining foreclosures from the economic downturn.

These properties can be in poor condition and/or in a less desirable location. Distressed properties will, however, add much needed inventory in coming months.

Investors and other buyers should be prepared to do more extensive renovations with these properties. Buyers needing an equity loan to do this rehab work, hopefully, will qualify for a HELOC.


Mary Ann Clark is a Realtor with Coldwell Banker at 177 West Putnam Avenue in Greenwich. Questions or comments may be emailed to [email protected]

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