Home equity lines of credit (HELOCs) are experiencing a renaissance. Should you take a cue from the market and get in on the HELOC boom?
Equifax recently reported that $120 billion in HELOCs were originated last year, a 21.5 percent increase over the prior year. In all, 1.2 million of these lines of credit were opened in the process, a 15.8 percent year-over-year increase.
The number and dollar volume of HELOCs represents a six-year high; this resurgence is a function of low interest rates combined with a recovery in home values, which has helped restore equity for many home owners.
That restored equity value gives home owners multiple ways of borrowing against that equity:
- The line of credit approach sets terms as to how much the home owner can borrow, what interest rate will be charged, and how it will be repaid, but the home owner can wait until the money is actually needed before borrowing it, and can borrow it in separate increments to match up with emerging needs.
- A home equity loan is typically a second mortgage, allowing the home owner to borrow cash in exchange for equity that has built up in the home.
- Cash-out refinancing is a refinanced mortgage for more than the remaining balance on the existing loan. This allows the home owner to capture more favorable terms on the existing loan balance while also borrowing against equity on the same terms.
Compared to the other two, a HELOC makes the most sense if you have a series of projects or other uses for home equity money, and want to secure access to that credit upfront without starting to pay interest until you actually use it. Similarly, a HELOC may make sense if you anticipate a need for borrowing against home equity in the months ahead, but want to lock in today’s favorable interest rate terms.
When a financial trend is popular, as HELOCs are now, you shouldn’t just blindly follow along. However, you should take it as a cue to look at why so many people are making that decision, and whether it makes sense for you.