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Americans are taking out home equity lines of credit in droves

Date posted:  6/24/14 10:15:00 AM Many homeowners use the money from their home equity line of credit to do home renovations.

The arrow is pointing up for home equity lines of credit. According to a report from The Washington Post, American homeowners are talking out these lines of credit at an astonishing pace.

Homeowners across the nation have pulled approximately $120 billion in new home equity lines of credit in the last 12 months, which is a 27 percent increase from the previous year to date. Additionally, Americans took out $23.4 billion in home equity lines in the first quarter of 2014, a 15.5 percent climb from 2013 and the highest number in six years, according to the credit report agency Equifax.

A home equity line of credit asks a homeowner to put his or her property down as collateral for a line of credit in return. Borrowers often use this type of loan to put a down payment on a car or pay for a home remodel.

Much of the surge has come from the West Coast and Northeast, as many homeowners are taking advantage of increasing home values. California residents alone took out roughly $6 billion in new home equity lines of credit over the last 12 months, which is about five percent of the entire dollar amount pulled throughout the nation in regard to home equity lines of credit.

Home equity lines of credit were also popular in Wyoming, which saw a 169 percent surge in approvals from the previous 12 months prior. Home equity approvals were also up in Oklahoma (85 percent), Arizona (79 percent), Florida (53 percent) and Ohio (52 percent).

What started the trend?
Rising home values and relatively low interest rates have been a strong catalyst behind the increase in home equity lines, according to The Dallas Morning News. The Federal Reserve estimated homeowners' equity throughout the country increased by more than $2.1 trillion from the first quarter of 2013 to the first quarter of 2014.

Flexible payment options are also luring homeowners into taking out a line of credit. The Post reported homeowners with good credit scores often find interest rates ranging from 3.5 to four percent. Repayment terms are generally interest-only for a certain number of years before the payments "reset" to include principal and interest.

Liz Weston, a personal finance columnist, told U.S. News & World Report a few reasons why home equity lines of credit are currently in vogue.

"Even a fat emergency fund can get drained by a big-enough financial setback, and most people don't have a fat emergency fund," Weston said. "The key, though, is, again, not to squander that equity. You want it there for you when you need it. If you're such a spendaholic that you can't trust yourself not to use the line, then of course you shouldn't set one up."

Most experts agree the best way to utilize a home equity line of credit is by putting that money back into the home. If a person receives a $45,000 line of credit, they might want to consider using it on renovation that adds roughly the same dollar value back to their home, which essentially will allow them to break even on the money borrowed.

Bad credit and home equity lines
With the number continuing to rise for Americans who garnered a home equity line of credit, a growing number of banks are granting credit lines to applicants with poor credit histories, although those with subpar credit can usually draw no more than $30,000 from such a line.

"It's important to think about whether the payments are affordable and whether it's worth putting the equity in your house at risk," Debbie Goldstein, executive vice president at the Center for Responsible Lending, told The Dallas Morning News.