Back before the housing market imploded, there was a beast that roamed the streets of suburban America. Its name was HELOC: the home equity line of credit.
When lenders thought home prices would never stop rising, they let homeowners take equity out of their home through a line of credit, which they could use it for all kinds of purchases. But since the crisis, HELOCs — a form of second mortgage — have been deep in hibernation. Now, they are slowly waking. And they’re hungry.
HELOCs aren’t anywhere near as prevalent as they were pre-crisis. But they were up 8 percent in the first quarter over last year, in part because banks are marketing HELOCs to homeowners again.
Home prices are rebounding and the credit market is loosening, but inventories are still low, says Steve Cook, the editor of Real Estate Economy Watch: “So I think one of the things we are seeing now is a lot of homeowners deciding to remodel because now they can.”
Andrew Pizor is a staff attorney at the National Consumer Law Center. He says after the financial crisis, the Consumer Financial Protection Bureau (CFPB) changed regulation and disclosure rules for traditional mortgages, but not for HELOCs.
“The CFPB said they are going to be working on that down the road, but they haven’t gotten to it yet,” says Pizor.
Pizor doesn’t recommend HELOCs for large one-time purchases, but he says they can be a good option for establishing a long-term line of credit, as long you understand the terms of the loan.