A home is an investment, sure—but as you pay down that mortgage, it starts to look more like a giant piggy bank. That’s why homeowners jonesing to remodel their homes, make a big purchase, or send their kid to college are rushing to take out loans against the value of their homes, before interest rates rise further.
The number of homeowners taking out a home equity line of credit, or HELOC, in the U.S. hit 347,875 in the first quarter of 2018, according to a recent report from real estate information firm ATTOM Data Solutions. That’s 18% more than the previous quarter—and 14% more than a year ago. (To come up with its findings, ATTOM analyzed publicly recorded mortgage documents and deeds of trust for properties up to four units. The value of the loans was calculated by multiplying the number of new mortgages, including HELOCs, by the average loan amount.)
Rising interest rates may be responsible for the boom, as higher rates cost homeowners more over the life of their loans. The Federal Reserve raised rates by 0.25% on Wednesday and is expected to boost them by the same amount at least once more, if not twice, this year.
“You have the combination of rising home equity, which people are taking advantage of, and then the rising interest rates are making the HELOC option more appealing,” says Daren Blomquist, senior vice president at ATTOM.
Homeowners might not end up taking all of their approved loan amount, and Blomquist points out they have to pay interest only on what they actually borrow.
Most HELOCs are structured so that borrowers have to make payments on only the interest for the first 10 years. Also, despite interest rates notching up, HELOCs generally still boast lower rates than personal loans or credit cards.
For example, the average credit card rate is a whopping 17%, according to Bankrate.com data cited in a recent USA Today article. Personal loans can run from 4.29% to 25%, according to Bankrate.com. But the average HELOC rate is 5.92%. That’s some substantial savings.
The metropolitan areas with the biggest annual increase in the number of HELOCs were Athens, GA, at 176%; Chattanooga, TN, at 165%; Norwich, CT, at 99%; Kingsport, TN, at 92%; and Atlantic City, NJ, at 87%, according to ATTOM. The firm compared the first quarter of 2018 with the same quarter a year earlier.
“That [home] equity can be used for a variety of different things if people can access it,” says Chief Economist Danielle Hale of realtor.com®. “They might remodel their home, they might tap into it to start a business, they might tap into it to send their kid to college.”
But she cautions homeowners against taking out a line of credit just because they can.
“If you’re using the money to invest, it is very cost-effective,” Hale says. “But keep in mind you have to pay that money back. You probably shouldn’t tap into it to go on vacation.”