HELOCs Being Put to Better Use

December 2, 2014

Home equity lines of credit are becoming one of the fastest-growing segments in the mortgage market, but home owners appear to be using the money more responsibly than they did before the housing crisis, the Los Angeles Times reports.

During the first half of the year, HELOCs climbed 21 percent compared to the same period last year, according to credit bureau Equifax. Home owners borrowed $66 billion against their equity — which they are gaining thanks to rising home prices and historically low interest rates — during the first half of this year, and lenders extended 670,000 new HELOCs during that time. That marks a six-year high for both measures, according to Equifax.

HELOCs were once thought of as a convenient source to tap for cash when you needed it, but home owners indicate that they are putting the money to good use now. Slightly more than half of 1,346 home owners recently surveyed by TD Bank say they are using or have used their HELOCs to pay for remodeling projects that are likely to increase the market value of their homes. Projects cited include kitchen updates, bathroom additions, new roofs, and other remodeling projects.

Another 29 percent of respondents say they have used their HELOC money to take advantage of interest rates on financial products, consolidate debts, or pay off credit card balances.

Also, nearly a quarter of home owners say they've used the HELOC money to pay off emergency expenses for unexpected events. The survey identified other major uses of HELOCs: buying new cars (27%); paying medical bills (18%); kids' and adults’ education costs (15%); travel (15%); and small business investments (13%).

Michael Kinane, TD Bank's head of consumer and mortgage lending, says home equity lines of credit are a "much safer" financial product in 2014 than in past decades. Most banks limit the combined loan-to-value ratio, or the total of the primary mortgage balance plus the maximum amount they can take out compared to their home value, to 80 percent. Also, to qualify for a HELOC, lenders are more thoroughly reviewing documented income, employment, credit, and property values. 

Source: “More Owners Tapping Home Equity Lines of Credit,” Los Angeles Times (Nov. 30, 2014)