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Home equity lines gain popularity

Date posted:  9/23/14 01:45:00 PM Homeowners are more willing to take out home equity lines of credit.

Home equity lines of credit are gaining steam. After home values increased in many regions across the country over the last year, homeowners are more willing to dive into the equity of their homes to receive a line of credit, according to RealtyTrac, a source for housing information.

RealtyTrac reported that home equity lines notched a 20.8 percent increase in the 12 months ending June 2014 compared to the previous year.

Janet Gels grasped the importance of receiving some additional cash flow. Gels, a 66-year-old small business owner, told Bloomberg she chose to take out a $30,000 home equity line of credit to cover some of the costs of her company. She operates a bed and breakfast in Ohio and said she plans to keep some of her credit line in reserve in case any unanticipated costs come to the forefront.

"If we don't use it, we don't pay interest on it," Gels said. "That's one of the things I like about a (home equity line of credit) - you can spend some of it now, and hold the rest in reserve."

Home equity lines of credit made up 15 percent of all home loan originations in 2014 through the end of August. That is the highest market share for these types of loans since 2008.

"Nearly 10 million homeowners nationwide, representing 19 percent of all homeowners with a mortgage, now have at least 50 percent equity in their homes," said Daren Blomquist, vice president of RealtyTrac. "Meanwhile the percentage of homeowners with severe negative equity has decreased from 29 percent in the second quarter of 2012 to 17 percent in the second quarter of this year."

Blomquist added the growing popularity of home equity lines of credit reveals that many homeowners are starting to gain confidence in the economy and the housing industry. He said the most important factor for the rise in these loans is that more homeowners are now able to take out such credit because they've regained the equity lost since the burst of the housing bubble.

Another product banks can offer
Banks and financial institutions are seeing the potential in home equity lines of credit. With improved home values, banks can now offer a product to a larger number of homeowners. Blomquist said banks will usually only offer home equity lines of credit to individuals with solid value in their home.

"HELOCs are a way for them to actually expand their mortgage businesses rather than have to cut back," Blomquist said of banks.

Americans who take out a home equity line of credit must offer their homes as collateral to reduce the risk of the lender. These lines of credit can then be used for home renovations, down payments on a car or student loan repayment.

"The rise in HELOCs also reflects a natural evolution for a lending industry looking for products they can offer to homeowners who have already refinanced their first position loan into a low fixed rate," Blomquist added. "A HELOC enables homeowners to leverage additional equity they may have gained since refinancing while still preserving the rock-bottom interest rate on their first position loan."

By the numbers
Although home equity lines of credit have gained popularity, they still remain below their highest levels in 49 of the 50 major metro areas, according to RealtyTrac.

Gregory McBride, chief financial analysts with Bankrate, said some of that has to do with approval rates before the burst of the housing bubble. In the current economic environment, banks have tightened lending standards. But back before the housing crisis, McBride said "If you could fog a mirror, you could get approved."