Home Equity Loans Make a Comeback

After several years of limited activity, today many U.S. homeowners are starting to take a look at home equity loans again, a trend that is a product of rising home prices and low interest rates.

According to credit reporting bureau Equifax, the number of new home equity lines of credit (HELOCs) rose 19 percent in the last part of 2012. And banks like JPMorgan Chase are seeing even more dramatic increases.

“Nationally we’ve seen a 31 percent increase in HELOC’s year-over-year,” said a spokesperson from JPMorgan Chase in an NBC News article.

And while home equity loans have been a normal part of the housing market for several decades now, the jump seems surprising given that 7 million homeowners across the country are still underwater, or owe more on their mortgages than their homes are worth. When the housing market crashed, equity plummeted for most borrowers and HELOCs seemed to fall by the wayside. In fact, in 2008 the number of new HELOC loans fell 55 percent, and continued to drop for several years.

Yet, as home prices rose 8 percent in December from the previous year, millions of Americans regained a good chunk of equity and wanted to put it to use. Certainly not in the numbers they were during the housing boom, though: In 2006, Americans borrowed $28 billion in HELOCs compared with last year when they took out just $7.2 billion.

And there is hope that borrowers are being smarter with these additional mortgage loans this time around. Instead of spending their converted equity on cars, boats, vacations, and other luxury items, homeowners are pulling out the cash for more sensible debt.

“We are seeing more responsible uses today, like home improvements, education expenses or other major expenses that would be a more responsible use of a customer’s home equity,” said Brad Blackwell, an executive with Wells Fargo Home Mortgage in the same article.

HELOC originations are very likely to increase in 2013 as home prices are predicted to rise another 5 percent or so this year. Interest rates are also likely to grow, enticing more borrowers to stick with their rock-bottom interest rates and just use home equity lines to tap their budding equity.

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