Fewer homeowners tapping home equity well
After years of piling debt on their homes, Americans are becoming more cautious about using them as a piggy bank.
A cooling housing market and higher interest rates have made homeowners more reluctant to tap the equity they may have built up in their residences. The amount borrowers owe on their home-equity lines of credit has slipped in the past six months, to $561 billion at the end of March, the first such decline since 1999, according to new data from Equifax Inc. and Moody's Economy.com Inc. Although that decline was partly offset by a pickup in fixed-rate home-equity loans, total home-equity borrowing rose just 9 percent in the 12 months through March, well below the 21 percent average annual growth rate of the past five years.
"People are feeling uncertain about the value of their home and are feeling tapped out," says Doreen Woo Ho, president of Wells Fargo & Co.'s consumer-credit group.
Some homeowners have decided to "wait and see what happens to real estate," says David Rupp, Bank of America Corp.'s home-equity executive, "or they may view themselves as not needing to borrow."
During the housing boom, demand for home-equity lines of credit climbed sharply as property values rose, interest rates fell and lenders made it easy for borrowers to tap their equity for everything from home improvements to vacations. Borrowing against home equity freed up roughly $187 billion in cash per year between 2001 and 2005 that was used to pay off other debts and for new spending, according to a recent paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy.
Now, the slowdown in home-equity borrowing is leading to weaker sales in some markets for autos, building materials and electronics, says Mark Zandi, chief economist of Economy.com. The slowdown has been particularly notable in parts of the country that are suffering most from housing and mortgage corrections, including Boston, Minneapolis, Miami, Las Vegas and Washington.
Rising short-term interest rates have driven rates on home-equity lines of credit to an average of 8.7 percent, up from as little as 4.64 percent in April 2004, according to HSH Associates. Home-equity lines carry a variable rate, usually tied to the prime-lending rate, and give homeowners the right to borrow up to a certain amount, either all at once or over time.
Meanwhile, rates on home-equity loans, which provide borrowers with a fixed-rate and a lump sum, have also increased, but not as much as lines of credit. Home-equity loans average 8.1 percent, up from 6.75 percent since April 2004, HSH says.
As a result, more borrowers have opted for the stability of a fixed-rate home-equity loan over the flexibility offered by a line of credit. Balances on fixed-rate home loans climbed 24 percent to $290 billion in the 12 months ended in March, according to Equifax and Economy.com.
Also, some borrowers who already have lines of credit are refinancing into a new fixed-rate mortgage or fixing the rate on some or all of their credit line, an increasingly common option, says Mitch Ohlbaum, a mortgage broker in Los Angeles. Rates on 30-year fixed-rate mortgages currently average 6.37 percent, HSH says.
Felice Soule, a medical-device saleswoman in Los Angeles, cut the balance on her home-equity line of credit to $58,000 from about $168,000 when she refinanced her $1 million mortgage. The rate on the home-equity line had jumped by more than two percentage points to 9.25 percent since she took out the credit line two years ago. "By refinancing and rolling (most of the home-equity line) into the first mortgage, it's saving me around $800 a month," she says.
But Keith Gumbinger, an HSH mortgage analyst, says this strategy doesn't make sense for every borrower. By doing a cash-out refinance, you're also extending the length of your mortgage, which means your "total interest charges over time are likely to be higher" than they would be with a home-equity line or loan, he says. And in some cases borrowers may face a prepayment penalty, which can range from a few hundred dollars to 2 percent of the loan amount, if they close down their home-equity line or loan in the first few years.
Even at today's higher rates, a home-equity line or loan can be an attractive option. Rates are generally lower than for most other sources of financing, and interest payments are typically tax deductible. Most borrowers who have owned their homes for several years still have plenty of equity they can tap.
"If you need the money to clear up some credit-card debt, it's certainly worth the trade-off," says David Lesnick, a financial planner in Goodyear, Ariz. But Lesnick is also advising clients to proceed with caution. "If it's something that could wait, let it wait," he says.
Lenders are responding to slowing demand for home-equity borrowing by boosting their marketing, unveiling special offers and focusing on traditional uses of home equity, such as home improvement and debt consolidation. Wells Fargo rolled out a "Home Improvement Program" that gives home-equity customers discounts at retailers such as Best Buy, Brookstone and LampsPlus.com and access to a network of third-party local contractors.
J.P. Morgan Chase & Co. is running its first cable-television advertising campaign for home-equity borrowing, focusing on the product's flexibility. It's also rolling out a training program designed to help bankers in Chase branches do a better job of selling home-equity products. Bank of America, has launched a "green" home-equity card program, in which the bank will make a $100 donation to environmental group Conservation International on behalf of new home-equity customers who use their equity-line Visa card for purchases of $2,500 or more.
Delinquencies on home-equity lines of credit also have climbed, to 1.29 percent in the first quarter, according to a separate study by Equifax and Economy.com. That's up from 0.8 percent a year earlier and the highest level since early 2002.
Partly as a result, lenders are tightening their standards. That, in turn, is making it tougher for some borrowers to get so-called piggyback mortgages, which combine a mortgage with a home-equity loan or line of credit and allow borrowers to finance more than 80 percent of a home's value without paying mortgage insurance.
National City Corp. says that in the past 60 days it has tightened its standards for home-equity loans made to borrowers providing little, if any, documentation of their income or assets. E. Kennedy Carter Jr., a National City executive vice president, says the bank saw applications for these loans jump as other lenders withdrew from the market when institutions who invest in mortgage-backed securities lost their appetite for riskier loans. Citigroup Inc.'s Citibank also tightened its eligibility standards for home-equity loans.
Gibran Nicholas, a mortgage broker in Ann Arbor, Mich., says one of his clients was hoping to tap the equity on his $1 million home in an effort to make up for a sharp drop in his income, but couldn't because he had been late on some payments. "Lenders are not looking to do 100 percent financing for people with less than stellar credit," Nicholas says.
By ; RUTH SIMON
Via : homes.dailyherald.com
A cooling housing market and higher interest rates have made homeowners more reluctant to tap the equity they may have built up in their residences. The amount borrowers owe on their home-equity lines of credit has slipped in the past six months, to $561 billion at the end of March, the first such decline since 1999, according to new data from Equifax Inc. and Moody's Economy.com Inc. Although that decline was partly offset by a pickup in fixed-rate home-equity loans, total home-equity borrowing rose just 9 percent in the 12 months through March, well below the 21 percent average annual growth rate of the past five years.
"People are feeling uncertain about the value of their home and are feeling tapped out," says Doreen Woo Ho, president of Wells Fargo & Co.'s consumer-credit group.
Some homeowners have decided to "wait and see what happens to real estate," says David Rupp, Bank of America Corp.'s home-equity executive, "or they may view themselves as not needing to borrow."
During the housing boom, demand for home-equity lines of credit climbed sharply as property values rose, interest rates fell and lenders made it easy for borrowers to tap their equity for everything from home improvements to vacations. Borrowing against home equity freed up roughly $187 billion in cash per year between 2001 and 2005 that was used to pay off other debts and for new spending, according to a recent paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy.
Now, the slowdown in home-equity borrowing is leading to weaker sales in some markets for autos, building materials and electronics, says Mark Zandi, chief economist of Economy.com. The slowdown has been particularly notable in parts of the country that are suffering most from housing and mortgage corrections, including Boston, Minneapolis, Miami, Las Vegas and Washington.
Rising short-term interest rates have driven rates on home-equity lines of credit to an average of 8.7 percent, up from as little as 4.64 percent in April 2004, according to HSH Associates. Home-equity lines carry a variable rate, usually tied to the prime-lending rate, and give homeowners the right to borrow up to a certain amount, either all at once or over time.
Meanwhile, rates on home-equity loans, which provide borrowers with a fixed-rate and a lump sum, have also increased, but not as much as lines of credit. Home-equity loans average 8.1 percent, up from 6.75 percent since April 2004, HSH says.
As a result, more borrowers have opted for the stability of a fixed-rate home-equity loan over the flexibility offered by a line of credit. Balances on fixed-rate home loans climbed 24 percent to $290 billion in the 12 months ended in March, according to Equifax and Economy.com.
Also, some borrowers who already have lines of credit are refinancing into a new fixed-rate mortgage or fixing the rate on some or all of their credit line, an increasingly common option, says Mitch Ohlbaum, a mortgage broker in Los Angeles. Rates on 30-year fixed-rate mortgages currently average 6.37 percent, HSH says.
Felice Soule, a medical-device saleswoman in Los Angeles, cut the balance on her home-equity line of credit to $58,000 from about $168,000 when she refinanced her $1 million mortgage. The rate on the home-equity line had jumped by more than two percentage points to 9.25 percent since she took out the credit line two years ago. "By refinancing and rolling (most of the home-equity line) into the first mortgage, it's saving me around $800 a month," she says.
But Keith Gumbinger, an HSH mortgage analyst, says this strategy doesn't make sense for every borrower. By doing a cash-out refinance, you're also extending the length of your mortgage, which means your "total interest charges over time are likely to be higher" than they would be with a home-equity line or loan, he says. And in some cases borrowers may face a prepayment penalty, which can range from a few hundred dollars to 2 percent of the loan amount, if they close down their home-equity line or loan in the first few years.
Even at today's higher rates, a home-equity line or loan can be an attractive option. Rates are generally lower than for most other sources of financing, and interest payments are typically tax deductible. Most borrowers who have owned their homes for several years still have plenty of equity they can tap.
"If you need the money to clear up some credit-card debt, it's certainly worth the trade-off," says David Lesnick, a financial planner in Goodyear, Ariz. But Lesnick is also advising clients to proceed with caution. "If it's something that could wait, let it wait," he says.
Lenders are responding to slowing demand for home-equity borrowing by boosting their marketing, unveiling special offers and focusing on traditional uses of home equity, such as home improvement and debt consolidation. Wells Fargo rolled out a "Home Improvement Program" that gives home-equity customers discounts at retailers such as Best Buy, Brookstone and LampsPlus.com and access to a network of third-party local contractors.
J.P. Morgan Chase & Co. is running its first cable-television advertising campaign for home-equity borrowing, focusing on the product's flexibility. It's also rolling out a training program designed to help bankers in Chase branches do a better job of selling home-equity products. Bank of America, has launched a "green" home-equity card program, in which the bank will make a $100 donation to environmental group Conservation International on behalf of new home-equity customers who use their equity-line Visa card for purchases of $2,500 or more.
Delinquencies on home-equity lines of credit also have climbed, to 1.29 percent in the first quarter, according to a separate study by Equifax and Economy.com. That's up from 0.8 percent a year earlier and the highest level since early 2002.
Partly as a result, lenders are tightening their standards. That, in turn, is making it tougher for some borrowers to get so-called piggyback mortgages, which combine a mortgage with a home-equity loan or line of credit and allow borrowers to finance more than 80 percent of a home's value without paying mortgage insurance.
National City Corp. says that in the past 60 days it has tightened its standards for home-equity loans made to borrowers providing little, if any, documentation of their income or assets. E. Kennedy Carter Jr., a National City executive vice president, says the bank saw applications for these loans jump as other lenders withdrew from the market when institutions who invest in mortgage-backed securities lost their appetite for riskier loans. Citigroup Inc.'s Citibank also tightened its eligibility standards for home-equity loans.
Gibran Nicholas, a mortgage broker in Ann Arbor, Mich., says one of his clients was hoping to tap the equity on his $1 million home in an effort to make up for a sharp drop in his income, but couldn't because he had been late on some payments. "Lenders are not looking to do 100 percent financing for people with less than stellar credit," Nicholas says.
By ; RUTH SIMON
Via : homes.dailyherald.com
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