REAL ESTATE by AnnaMaria Andriotis, Wall Street Journal
Once every homeowner’s answer to a cash shortfall, the ability to borrow against your home equity all but disappeared a few years ago right along with, well, home equity. But now, at a growing number of banks around the country, home equity loans and lines of credit are back – and so are the pitfalls that go with them.
After more than three years, some lenders are cautiously re-entering the second mortgage market. The effect hasn’t registered in the national statistics yet, but regional banks are reporting significant increases. In the Midwest, Associated Bank issued nearly three times more home equity loans in the second half of 2010 compared to the same period the year before. SunTrust Bank, which operates mostly in the south and Mid-Atlantic, has issued 25% more home equity lines of credit in the past six months compared to the first half of 2010. And during the past year at Citizens Bank, which has branches mostly in the northeast, HELOC originations were up 35%. Unlike the largest lenders, these banks have been less affected by the subprime mortgage meltdown and they lend in limited areas, often where homes have lost less value, says Stu Feldstein, president at SMR Research, which tracks home loan data.
These aren’t small loans, either. At Associated, the average home equity loan, taken once as a lump sum, is around $75,000; at Citizens, the average credit line on a HELOC, which borrowers can tap over time, is around $100,000. That’s enough for cash-strapped homeowners to pay for renovations or home repairs – especially if they’ve decided to stay in a house they can’t, or don’t want, to sell in the current market. “We found an opportunity that we can take advantage of,” says Val Glytas, director of consumer lending at Associated Bank.
This generosity, of course, is restricted only to the best borrowers: homeowners with at least a 720 FICO score, at least 20% equity in the home, and income verification, like pay stubs, for the past two years. That’s a stark change from pre-2008, when credit score thresholds were lower, income wasn’t always checked, and borrowers received loans for up to 100% of a home’s value — or more.
But even with the more stringent requirements, borrowers could still end up underwater if home prices in their neighborhood drop – a particular risk in areas where foreclosures are mounting. Another five million homes will go into foreclosure in 2011 and 2012 — cities like Boise, Idaho, Charleston, S.C., and Salt Lake City have been hit especially hard, says Rick Sharga, senior vice president at RealtyTrac.com, which tracks foreclosures.
For qualified borrowers willing to take that risk, the price of the borrowed money is steep. Average interest rates on home-equity loans and HELOCs are 7.15% and 5.22%, respectively, according to HSH Associates, which tracks the mortgage market. That’s lower than they were a year ago, but still significantly higher than, for example, the 4.2% average rate on car loans offered by dealerships and the 4.24% average rate on 15-year mortgages.
A home equity loan or HELOC may still be a better deal than refinancing, because many lenders are willing to waive loan origination fees and closing costs – something they typically won’t do for refinancing. But in exchange for waiving these fees, banks may impose other requirements, like borrowing a minimum amount, or keeping a line of credit or loan open for a set number of years. At SunTrust, for example, borrowers avoid closing costs if their HELOC is at least $10,000 and if they keep their line of credit for at least three years. And regardless, some banks will charge an early termination fee, commonly 1% of the outstanding balance, or a set fee that can be as high as $500, says Keith Gumbinger, vice president at HSH Associates, which tracks the mortgage market.
However, for homeowners who are in good financial standing but don’t have the cash on hand for a renovation, Junior’s college tuition, or aging parents’ medical bills, now could be a good time to sign up. Many banks offer variable or fixed rates; fixed rates are a better bet especially for the long term, because interest rates are likely to rise, says Feldstein. The relatively lower interest rates mean that, over 10 years at a fixed rate, a $50,000 HELOC will be nearly $1,000 cheaper than it would have been if the money had been borrowed last year. And with contractors cutting costs to win new business, some are slashing prices by up to 20%. With a typical bathroom or major kitchen remodeling costing $16,634 and $58,367 on average, respectively, according to Remodeling Magazine, haggling with a contractor now could save around $3,300 and $11,700, respectively.