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The real estate market has soared since 2020 and is anticipated to continue to stay at current levels through 2022. As homeowners experience monumental growth in their greatest asset, we’ll review how homeowners are using their growing equity.
A decade ago, it was common for homeowners to move every 3 to 5 years but now Baby Boomers are starting to retire and choosing to stay in their current homes rather than relocate. This set of maturing homeowners have chosen to take out equity loans for a variety of reasons, including making home improvements, improving quality of life, paying off debt, or taking trips after being shut in their homes during the pandemic.
At the same time, other generations of working professionals have been given the option to continue to work from home and found updates that need to be made to improve their quality of life while working.
Using financing options that take advantage of available home equity, such as a HELOC or home equity loan, could fund repairs or updates while offering reasonable monthly payments.
A home equity line of credit (HELOC) is a revolving credit line — often featuring variable interest rates — that allows a homeowner to pull money out as they need it up to a maximum borrowing limit. Some homeowners use HELOCs as a safety net that can provide funds in case of an emergency, while others use it for fluctuating costs like vacations or home improvements.
The draw period is the period (usually lasting up to 10 years) when a homeowner is allowed to use the line of credit through withdrawals. Monthly payments made during the draw period are often only interest charges against the withdrawals. When the repayment period (which can range from 5 to 20 years) begins, borrowers are required to pay back both principal and interest.
Many homeowners prefer a HELOC over using a credit card or unsecured personal loan because the interest rates are lower. HELOC rates are more competitive because the value of the home is used as collateral to back the line of credit.
Unlike in 2006 and 2007 before the last housing crash and drastic recession, the country hasn’t seen an overbuilt housing market with more inventory being added regularly. Economists believe that the current housing prices are sustainable and the current market is underbuilt with a low vacancy rate nationwide.
Lenders learned their lesson during the last recession and no longer lend 100% of home equity but have chosen to cap it at 80-85%, so if the market corrects, homeowners won’t be underwater on their mortgages.
This means that HELOCs are a great option in the current market because home improvements can raise home value, while the stability of the housing market makes lenders more comfortable lending on home equity.
Homeowners nationwide are choosing to take equity out of their homes to make improvements, consolidate high interest debt, pay off student loans, and improve their homes due to the stable housing market and the drastic increase in home values.
Families should make a plan for how they will spend and repay the money from a HELOC before applying. But for favorable interest rates, flexible borrowing, and high borrowing limits, HELOCs remain a reliable option for homeowners in 2022.
