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Home Sweet Valuable Home

Thinking about tapping into your home’s equity to remodel a master suite, build an outdoor kitchen or pay for college? If so, the good news is that attractive home equity loans and home equity lines of credit (HELOCs) are back. You’ll find, however, some changes since 2010 governing how proceeds can be used and how they must be repaid...

Today’s lending guidelines are based on lessons learned during the mid-2000s when mortgage debt surged. Home equity lines of credit (HELOC) loans gained popularity as borrowers took advantage of the rapid run-up in home prices to extract equity. Home equity, after all, could be used to supplement incomes and provide an additional source of liquidity. The game changed, however, in 2007 and 2008 when home values plunged dramatically.

Fortunately since 2012 the economic chill of the Great Recession has given way to warmer – and smarter – consumer lending practices. One key factor: CoreLogic.com reports that home values have steadily risen from the lows of 2009 and 2010 – albeit slowly – for the past three years. Last year alone, home values were up 3 percent and are expected to increase another 2 percent this year. That increase is supported by an improving employment picture, growing buyer and seller confidence, continued low rates and, in certain parts of the country, investor demand. 

“Home equity lines of credit, or HELOCs, are attracting more borrowers now that many … again have sizeable equity in their homes, says Amy Crews Cutts, Chief Economist at Equifax, adding that nationally home values have increased about 26 percent on average since January 2011.” 

The result: Americans are again opting for today’s more closely regulated home equity loan and home HELOC lending programs. Here in the Pikes Peak region homeowners will find both fixed- and adjustable-rate options.

“We offer both (HELOC and home equity loans) at Northstar Bank,” says Greg Welch, Northstar Bank Senior Vice President and Southern Region Commercial Banking Team.“The interest rates are variable, and largely depend on credit score and loan to value.”

Loan rates this spring were close to 4.75 percent in the Pikes Peak region – down from more than 6 percent in September 2014. “Stated differently, you’re looking at prime plus 1.50 percent floating,” Welch says.

Consumers benefit in two important ways:both HELOCs and home equity loans offer lower interest rates than most other forms of consumer credit, and the interest is typically tax-deductible. But they aren’t as easy to get as they once were.

Lessons learned from the housing bubble have led to new federal regulatory legislation affecting how banks and credit unions structure new purchase, refinance and home equity loan programs. These include changes to how and when certain disclosures are made, the appraisal process, and who at the financial institution can take and process an application, Welch notes.

Credit score and loan-to-value requirements are also considerably more stringent than they were before the housing crash. And lenders often require borrowers to have a combined loan-to-value of no more than 90 percent.  

That means if your home appraises for $300,000, and the mortgage principal balance is $200,000, you might be able to borrow as much as $70,000 with a home equity loan or line of credit. You’d retain 10 percent equity, or $30,000. Some lenders require 80% loan-to-value.

Before borrowing, consumers should do their homework.  Key pre-application steps include: shopping around; solidifying finances so available credit and level of debt compared to income result in a higher credit score; monitoring interest rates and comparing fees associated with a loan (usually ranging from 3 to 6 percent). Some also suggest investigating the option of a fixed-rate HELOC that usually carries a slightly higher interest rate.

Even in this conservative environment America’s appetite for home equity products is evident. This spring, Equifax’s “National Consumer Trends Report” showed new applications for home equity lines of credit up 21.5 percent in 2014 compared to the previous year. Best of all, the credit industry giant predicts continued growth through 2015 and beyond.