Renovating the kitchen, tricking out the bathroom or creating a relationship-saving man cave or she shed is now more doable than at any time since the financial crisis. Rising home values have pushed up our collective home equity, which is the value of our lairs minus the mortgage balance.
And we’re increasingly eager to scratch our upgrade itch. Homeowners are expected to shell out more than $350 billion for remodeling projects in the 12 months through September 2019, a 30% rise in just three years.
There are two ways to tap home equity. A classic home equity loan (HEL) is a standard fixed- loan. You get a chunk of money upfront, and then pay it back over a set period of time of five to 10 years, or longer.
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For years, home equity lines of credit (HELOCs) have been far more popular than HELs. A HELOC works a lot like a credit card: You have a credit limit you can borrow against (typically for 10 years), and any time you pay back any money, you regain borrowing capacity. The interest on HELOCs is variable, not fixed.
HELOCs have become even more popular since the financial crisis, as a change in lender regulations makes it more expensive for lenders to offer HELs.
It’s important to understand that the Federal Reserve is pulling the strings behind the curtain of HELOC s. The Fed determines the trajectory of short-term interest s through its Federal Funds . And most HELOC interest s are based on a formula that starts with the Fed Funds (or other short-term indexes) and then adds a few percentage points of “margin.”
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From 2008 through most of 2015, the Federal Reserve kept the Federal Funds near zero, as a way to encourage more economic growth coming out of the financial crisis. That made HELOCs a screaming deal, with s as low as 3% or so.
But with signs that the economy is in fact doing much better, the Fed has been slowly raising its target interest from the abnormal zero level. The Fed Funds is now above 2%. -watching experts give a high probability that by the fall of 2019, the Fed Funds will be in the vicinity of 2.5%.
That means that if you use a HELOC with a variable interest , you may likely be setting yourself up for higher s, and higher payments, in the future.
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For a big renovation project that you expect to need three, five or even 10 years to pay back, locking in the fixed of a classic HEL could be a financially smart move for the longer-term; it’ll also give you peace of mind that you won’t have any payment shocks in the future. Many credit unions continue to offer home equity loans.
A $50, 000 draw on a HELOC that you take 10 years to pay back will run you about $555 a month at today’s 6% average . If the rises to 7%, you’re looking at a payment of $580. If s creep higher, so too will your HELOC tab. (You can run the numbers using different assumptions.) Opt for a HEL and at today’s average 6.4% interest you can lock in a monthly payment of around $565, which won’t budge over the life of a 10-year payback.
Another option is to consider a newer twist in home equity borrowing: a hybrid HELOC that gives you the option of converting from the variable to a fixed . Just be sure you understand when you can convert and what your fixed will be. The fixed will obviously be higher than the variable. The peace of mind may be worth it, especially if you expect to take many years – not months – to repay the line.
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Housing market information is provided by Altos Research, Inc. based on analysis of all active market properties for sale in the US in the preceding week. All analytics are copyright Altos Research and not affiliated with any MLS.Banks have not been in a rush, thus far, to follow in JPMorgan Chase's footsteps when it comes to putting a hold on home equity line of credit lending. Competitors like TD Bank say they'll continue to offer HELOCs as long as there are quality applications.
Chase, exiting this business, at least temporarily, removes one of the larger HELOC originators from the business: it was the seventh largest by both loan and dollar volume in the fourth quarter last year, according to Attom Data Services.
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Changing a lending policy amid a destabilizing event is not without precedent. But, at a moment when similar financial products are coming to market and lenders are generally tightening their credit requirements, Chase's move may be the first indication that the entire home equity finance business could be changed dramatically as a result of the pandemic.
In the aftermath of the Great Recession and the resulting home price devaluation, many HELOC lenders first cut the amounts on existing lines, then closed unused lines before finally restricting access to the product altogether.
The HELOC share as a percentage of total originations went from 20.3% in the second quarter of 2008 to 8.6% one year later because of the housing market crash.
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As home values started to return, so did HELOC use, somewhat. By 2015, the share was in the mid-teens and starting in 2017 reached the upper teens on a consistent basis, before peaking at 20.1% in the fourth quarter of 2018. But the product has yet to overcome being labeled as a cause of the housing crisis because of its overuse by consumers that used their home like a credit card.
The most recent data shows another decline in market share to 13.5% in the fourth quarter of 2019, as mortgage rates began tumbling to what was near record low levels at that time.
But so far, today's situation is different, as early data from Redfin and Remax showed March's home sale prices were relatively stable compared with prior periods.
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Today, the fintech community offers alternatives to traditional home equity lending that did not exist at the time of the Great Recession. One such provider is Noah, which purchases an equity position in the home, said Sahil Gupta, the company's founder.
The fintech firm, which recently raised $150 million to support its investment program, did not disclose who the investors are, but the funding gives it the ability to try and provide more capital to home owners today, especially when banks and other companies are pulling back on consumer lending, Gupta said.
The typical contract period for the investment is 10 years, and in return the consumer does not have to worry about payments and interest rate changes (HELOCs are usually adjustable rate loans).
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We are going to share in the risk of home values with you, said Gupta. That means if home values go up, Noah will take a portion of the upside. However, if home values drop we also share in the same proportion of the downside. I think as an institution our promise should be no different in good times and in bad.
Another advantage is that Noah's funding timelines are much shorter. While HELOCs and home equity loans can take as much as 45 to 90 days to underwrite, Noah can provide funding in 15 to 20 days.
While Noah requires that the person applying for the financing is on the title, it has pretty broad guidelines around credit scores and debt-to-income ratios.
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But trying out a new lending product does come with some risk. Take for example Unison, which is a competitor to Noah in the equity sharing business. According to a notice on its website, Unison has stopped accepting applications. It has also laid off half of its staff. A message posted to the site says the company hopes to return, and is planning to create a wait list.
A third company, Hometap, which raised funds last December to finance its home equity sharing offering, is still active in the market as well.
Another equity sharing firm, Point, posted on its site that there are delays on
