In recent months, interest rates have risen to their highest level in years as the Federal Reserve has embarked on an aggressive tightening campaign in an effort to fight inflation. Despite rising rates, demand for home equity lines of credit (HELOCs) continues to surge with 2022 origination levels up more than 40% from a year ago, according to data from Citizens.
Undoubtedly, HELOCs have always been a compelling value proposition for the consumer, providing the convenience to fund home improvements and other major purchases at low rates with flexible repayment terms. Nevertheless, surging demand against a backdrop of rising rates seems counterintuitive, but a closer look at a trio of underlying dynamics makes it clear that this rebound is not only unsurprising but also likely sustainable.
Record levels of home equity
Homeowners today are sitting on record levels of equity in their homes and given the pace with which prices have increased in recent years, even borrowers that have recently purchased or refinanced a home likely have sufficient, tappable equity to make a HELOC a viable borrowing option.
For example, with home prices up roughly 20% nationally over the past year, a homeowner with a $500,000 property would have gained an additional $100,000 in tappable equity over the last twelve months.
Even if home prices experience modest declines in the coming months, many homeowners will still have adequate equity to make a HELOC an attractive alternative for their financing needs.
Cash-out refinance not a viable option
This phenomenon of rising home values is nothing new and many homeowners accessed their growing equity through a cash-out refinance transaction during the mortgage boom of the last two years.
With rates now rising; however, and many borrowers having locked in historically low rates on their first mortgage, tapping this equity through a cash-out refinance has become an increasingly unappealing option. Not only would the homeowner incur closing costs, but in most cases, the borrower would also have to stomach a higher rate on the existing mortgage balance. Alternatively, a HELOC can often be originated with no fees or closing costs, and importantly, with no impact to the rate on the existing first mortgage balance.
Last, but certainly not least, is the customer experience for borrowers. Cash-out refinance has not been the only source of competition for HELOCs in recent years. With the proliferation of unsecured personal loans, commonly delivered quickly through a frictionless digital experience, HELOC lenders have also seen customers essentially pay for convenience and accept higher interest rates in exchange for a better origination experience.
This too is changing as innovation in the home equity lending space has finally arrived. Consumers who are willing to shop around can find digital-led options with cycle times of under two weeks, placing the home equity experience on par with unsecured alternatives.
While these options are certainly not yet the norm, I expect the pace of innovation to continue to accelerate in the coming months with an increasing focus on speed and convenience.
Considering that none of these underlying dynamics are likely to change anytime soon, not only is the recent resurgence in HELOCs unsurprising, but it’s also likely here to stay.
In fact, we may be at the beginning of a long-term shift in consumer demand with appetite for HELOCs rising to levels not seen since before the financial crisis more than a decade ago.
Adam Boyd of Head of Home Equity Lending at Citizens Bank.
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