Equity credit lines are making a comeback as home prices rise

home-equity-loanNew data provided by national credit bureau Experian and researchers at the Oliver Wyman consulting organization suggest that a rebound boom in equity-tapping is underway. Owners have pulled out $120 billion in new home equity credit lines in the last 12 months, a 27% increase in volume over the year earlier.

In many cases these are not small lines, either. For owners with high credit scores, the average amount that can be drawn down on new lines is just under $120,000. For those with good but not perfect credit, dollar limits average in the $40,000 to $60,000 range.

Home equity credit lines — commonly referred to as HELOCs — typically are second mortgages. Unlike standard second loans, HELOCs are structured as open lines of credit that the borrowers can access up to a stated limit. Lines are often used to pay for home renovations, college tuition and other recurring big-ticket expenses.

HELOCs are particularly attractive because of their low interest rates and repayment flexibility. Rates for owners with good credit run from the mid-3% range to 4%. Repayment terms typically are interest-only for an initial period of years, after which payments “reset” to include principal plus interest.

Most HELOCs are made by banks. As long as the total mortgage debt secured by a house — the combination of the first mortgage plus the maximum HELOC amount — does not exceed 80%, banks believe that they have a margin of safety should home values decline. But some banks and credit unions recently have begun pushing the combined debt limit to 90%, provided applicants’ credit scores and documented incomes are high.

The rapid increase in new credit lines is the direct result of the significant gains in home prices in most parts of the country during the last year, researchers say. According to Federal Reserve estimates, owners’ equity holdings jumped by $2.15 trillion between the first quarter of 2013 and the first quarter of this year.

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