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Why home equity lines of credit have been getting more popular

Justin Ho Nov 24, 2022
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A sign advertises new homes at a construction site in Maryland. The mortgage market has been softening, but the market for equity-based loans has shown strength. Jim Watson/AFP via Getty Images

Why home equity lines of credit have been getting more popular

Justin Ho Nov 24, 2022
Heard on:
A sign advertises new homes at a construction site in Maryland. The mortgage market has been softening, but the market for equity-based loans has shown strength. Jim Watson/AFP via Getty Images
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We learned this week that the average interest rate on a 30-year fixed mortgage fell to about 6.6%, according to Freddie Mac. Mortgage rates are backtracking because there isn’t a whole lot of demand for them at those levels — last Thanksgiving, rates were just above 3%.

But there is one type of home loan that’s been getting more popular lately: home equity lines of credit, or HELOCs, which let homeowners borrow against their equity. That type of lending rose 5% in the third quarter, according to the real estate company ATTOM Data.

One reason home equity lines of credit are popular is that they tend to have lower interest rates than personal loans or credit cards, said Rick Sharga with ATTOM.

“Because they are secured against your home, and so the risk is much lower for lenders. Therefore they can pass along lower rates to borrowers.”

That can be pretty appealing. Sharga said that instead of buying a new home at today’s mortgage rates, many current homeowners have been using HELOCs to fund home improvements instead.

“Make modifications, add new parts to the house, update or upgrade things.”

But Sharga added that the growth of HELOC lending has started to slow down.

That could be because home prices have started to fall, which makes HELOCs more risky, said Susan Wachter, a real estate professor at the Wharton School.

“We can’t rule out significant declines in home prices over the coming year, depending on if we have a recession and how deep it is,” she said.

If that happens, Wachter said, people who default on a HELOC could face serious consequences, since their collateral is their home.

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