Feb 6, 2023 - Economy & Business

Home equity loans are booming — here’s why

Data: TransUnion; Chart: Axios Visuals
Data: TransUnion; Chart: Axios Visuals

Home equity lines of credit are the belle of the ball in the high mortgage rate world. Originations soared in the third quarter of last year, per TransUnion data released last week.

What's happening: Homeowners are "suffering" from what the Urban Institute calls the "I hate my house, but I love my mortgage" syndrome.

How it works: A homeowner might ideally want to buy another house with different features, but either can't afford a higher mortgage rate or doesn't want to give up their 3% bargain. (The golden handcuffs!)

  • Maybe back in the day, these folks would do a cash-out refinance. But that would be nuts right now — you'd wind up paying a higher mortgage rate.
  • Enter the home equity line of credit (HELOC), which lets homeowners borrow some amount of money — less than the value of the whole house, as with a refi to make home renovations, pay down credit card debt, deal with expenses, etc.
  • To put it in fancier parlance, "Borrowers can preserve the low rate on their first mortgage while tapping equity to meet cash needs," write the authors of the Urban Institute report.
  • It certainly helps that homeowners are sitting on record levels of home equity, too.

The catch: Because banks tend to hold HELOCs on their balance sheets rather than sell them, borrowers need very high credit scores to qualify.

What they're saying: The frenzy for HELOCs began in the summer. "Every mortgage company in the country started calling me," said John Toohig, head of whole loan trading at Raymond James.

  • With consumers looking to consolidate high-interest credit card debt, and lenders looking to gin up business in the wake of the lackluster first mortgage market, "HELOCs will likely remain a popular option in 2023," said Andy Walden, VP of enterprise research at Black Knight.
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