As home prices have risen, the return of the Home Equity Line of Credit (HELOC) has followed.
They’re not easy to get, but anyone involved in real estate (or read the newspaper since 2008) may treat them with a new sense of respect…or fear.
Many homeowners and investors made the critical mistake of over-leveraging themselves during the last housing bubble, find themselves years later upside down in equity, facing foreclosure, or needing to short sale.
For the first 9 months of 2013, new home-equity loan activity rose almost 31% compared with the same time period of the year before. The data collected was published by Inside Mortgage Finance recently, a mortgage industry publication.
To put it in perspective, in 2006, the LOC activity was at a high of $430 Billion dollars. In 2013, the volume is supposed to be around $60B, a fraction of that in the bubble, but still the highest since 2009.
As far as year over year growth, Equifax and Moody’s Analytics expect growth of 5-10% in 2014 from 2013, but not as much from 2006-2007. They note that the market recovery is still in the early period, and that there are millions of people nationwide still underwater.
Lenders are understandably more hesitant to issue these loans. Getting one and closing one is difficult, and many lenders will not a allow a combined loan to value (LTV) of over 80% of the homes value. Depending on when you bought or where the home is, you may not have 20% equity in the house yet to even make a HELOC an option.
If you do, should you use it?
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What’s it good for?
In many cases, granting a HELOC during the housing bubble was much like an irresponsible parent handing a credit card to a conceited adolescent. A false sense of entitlement, fictional wealth, and little stated caution make for a dangerous combination to the dollar-struck homeowner or risk-taking investor.
Many a guru unveiled the ingenious plan for making massive amounts of wealth – leverage your current assets to the hills and buy more. You tell me how that turned out.
To the other effect, some homeowners use HELOC’s for home improvements, funding for small business’, and consolidating debt. Interest rates on HELOC’s can be better than those from the SBA (if you could get one), credit cards, or other personal loans. Also, the interest can be tax deductible.
When used and monitored responsibly, Lines and Loans of this nature can be tapped into for strategic investments, whether it be a business or property.
Knowing What You’re Signing up for
When lenders were giving money away like candy, why read the fine print? The fallacy of self-confidence in a rising market stranded millions upon millions of people up the creek without a paddle, and all of the sudden we saw who was swimming naked.
As savvy investors, you know to read the details and see what the possible recourse is. You’ll want to see if what you’re getting is a line of credit, or a loan, and which is best for your needs. What the rate is tied to, and how often it can change. Also, if there’s a pre-payment penalty, and the amortization schedule.
In the worst case scenario, you’ll need to know what your options are. If you end up in foreclosure, and need to short sale, the deficiency rights on line of credit may change, depending on what you used the money for. If the money was used for vacations, cars, and other consumer spending, you may be looking at being on the hook for quite some time.
I’m not an attorney, and it may be different in your state, but simply said, it’s something to take into consideration should the house go into foreclosure.
Prime Rates Going to Rise in 2014?
HELOC’s and Home Equity loans are nearly all tied to the Prime rate, which is based on the federal funds rate, which is set by the Federal Reserve. Any changes made by the Fed have a far-reaching effect by having influence the borrowing costs of banks in the overnight lending market, and subsequently what banks can offer us on products like savings accounts, CD’s, and money market accounts.
The market sat in anticipation earlier in January on the news that the Fed may ease their bond-buying program, which has been at the rate of $40 billion per month, down to $35 billion. This showed confidence from the fed that the economy will improve, but also said it will likely keep the short-term rates (like Prime) down until they see the economy is in full-blown recovery.
They’re willing to risk inflation later down the road to hold rates where they are, which could fare well for investors and homeowners that want to take advantage of the historically low prime rate for awhile.
Where it could go in 2015 and beyond is anyone’s guess, but for the foreseeable future, it appears prime rate (and therefore HELOC and Home Equity Line rates), will be very low.
Do you think it’s still a good time to try to tap into equity and use these types of loan for your real estate/other business’? Or buy more property? Or do you steer clear of these types of loan now?
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