TransUnion expects boost in home equity borrowing
As rising home prices have caused many residences to have a significant amount of wealth tied up in the property, the credit bureau TransUnion says it expects a major increase in home equity borrowing in the near future.
Home equity is the difference between a property's fair market value and the outstanding balance of all loans secured by liens on the property. When a home's value is worth more than the outstanding balance, the homeowner has the opportunity to tap into this wealth through a home equity loan, home equity line of credit, or cash-out refinance.
Between the first quarter of 2011 and the first quarter of 2018, the S&P/Case-Shiller House Price Index increased by 42 percent. While home equity levels hovered at about $6 trillion between 2009 and 2011, they have grown even more rapidly than home prices since then. TransUnion said overall home equity in the United States is closing in on $15 trillion, more than $1 trillion higher than the equity total seen in the first quarter of 2006 at the height of the nation's housing bubble.
Joe Mellman, senior vice president and mortgage business leader at TransUnion, said there are several signs that homeowners may show more interest in capitalizing on their equity.
"Increasing consumer debt makes debt consolidation an appealing option and home equity can be the most economically attractive path to do just that," he said. "The recession caused a home equity lending pullback, which all but eliminated consumer marketing and education. We think there's an opportunity to reintroduce that education to consumers and help them evaluate how and when tapping home equity could make sense."
TransUnion said originations for home equity borrowing have been on the rise in recent years, although cash-out refinances fell between 2016 and 2017 after more than doubling in the previous two years. Originations for home equity lines of credit have grown steadily, with a year-over-year increase of 2.3 percent to 1.2 million in 2017.
"With rising interest rates and increases in home prices outpacing wage growth, homeowners are more likely to stay in their current homes, rather than 'move up,'" said Mellman. "This leads to a higher likelihood of improving their existing home and home equity can be a great tool for that."
Breaking down the use of home equity borrowing into five different categories, the TransUnion report found that 91 percent of people who tapped into their home equity between July 2016 and June 2017 used it to acquire cash for a major expense. This frequently involves reinvesting in the home by using the funds for improvements such as repairs or remodeling.
TransUnion said many of the 2.4 million home equity loans originated during this period were put to multiple uses. The report concluded that 41 percent of the loans were used to consolidate other debts, while 23 percent went toward refinancing the mortgage to get a better rate or term.
Homeowners were less likely to use home equity to "piggyback," or take out a home equity loan at the same time they were taking out another mortgage. This arrangement allows the homeowner to access a source of funding for a down payment on the new mortgage. However, only 4 percent of borrowers used their home equity for this purpose.
Few homeowners took out a home equity loan without a specific purpose in mind. Just 2 percent put the cash toward a rainy day fund or otherwise did not use the money right away.
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