By Carole Hawkins, [email protected]
It’s a changed world. Home prices are going up and the underwater mortgage is being exchanged for rising equity.
It’s a shift in fortunes that has brought back a type of lending which fell out of favor during the recession — the home equity line of credit or HELOC.
For Bank of America, home equity loans in Florida are up about 50 percent, said Sandy Robertson, who heads the bank’s home lending in Florida and Tennessee.
“It’s significant,” he said.
Secured by the equity in a home, HELOCs work much like a credit card, but with a lower interest rate.
Borrowers are pre-approved for a certain spending limit and can withdraw money when needed. Monthly payments can be as low as interest only, but at the end of the loan’s term, the outstanding amount must be repaid in full.
Before the recession the HELOC became an easy source of cash, to pay off credit cards or to pay for the kids’ college tuition, unexpected medical bills or a new swimming pool.
But spiraling debt and falling home values got some consumers into serious trouble.
As of the third quarter last year, 39 percent of homes still underwater had both first and second mortgages, a CoreLogic white paper said.
It’s a different situation this time around, Robertson said.
“Banks are handling things differently,” he said. “When we see that someone may be getting into trouble, we do some proactive outreach.”
The best way to use a HELOC is for reinvesting in a home, something that gives a return on investment and increases equity.
“Use it for a home remodel or to buy a second home,” Robertson said. “Don’t use it to take a trip around the world.”
Even though HELOCs aren’t always tied to home sales, there are times Realtors may advise a customer to use one, Robertson said. Such as:
• To help buy a second home. If they’ve found a great beach property for $40,000, the customer could use a HELOC to buy it for cash.
• For homeowners who want to sell in a year or two, they could use a HELOC to install hardwood floors and master bath and kitchen upgrades now. They can enjoy the upgrades for a little while, and when they’re ready to sell, they can put the house on the market more quickly.
Upgrades that give a biggest bang for the buck include hardwood floors, new roofs and energy efficiency upgrades, such as adding insulation or double-paned windows to older homes, Robertson said.
HELOCs can be better than a cash-out refinance because the borrower can use it many times without adding administrative fees. But they are variable-rate loans, so payments can spike if interest rates go up.
To protect against that, consumers could switch to a fixed-rate refinance after finishing repairs, Robertson said.