As homeowners rushed to their lenders this year to tap into record-high amounts of equity, most weren’t requesting a home equity line of credit (HELOC).
Instead, the most popular option to tap into this cash was with a cash-out refinance, where homeowners took out a larger mortgage, paid off their old one, and took the difference in cash.
This cash could then be used in whatever way the homeowner chose, including investing, paying off debts, or making home improvements.
Previously, the most common way to tap into this equity was with a HELOC.
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HELOCs are often compared to credit cards, because borrowers have a limit they can borrow up to and continuously repay. There is a set borrowing period, and after it’s ended, the borrower must repay the balance in full.
Experts say the reduced number of HELOCs is due to a few factors.
First, banks tightened up regulations after the financial crisis in 2007, and weren’t pushing HELOCs to clients. The number of revolving home equity loans has been on a downward slope ever since.
Simultaneously, homeowners became more cautious, too, based on concerns that drawing against their home equity was too risky.
When the pandemic hit, many banks stopped offering HELOCs once again as the housing market became too unpredictable and job loss was high.
Demand for HELOCs also disappeared, experts say, especially as record-low interest rates provided plenty of other options for homeowners.
With interest rates expected to rise into 2022, both mortgage lenders and homeowners may need to find an alternative way to tap into home equity — especially to avoid an unfavorable rate change or closing costs.
The solution may be for lenders to suggest HELOCs or home equity loans, experts say, offering borrowers an alternative to tap into their equity when refinancing is off the table.
Compared to a cash-out refinance, there usually are minimal closing costs associated with a HELOC.
Borrowers who like their current mortgage interest rate and terms may find a HELOC to be more beneficial than a cash-out refinance.
A HELOC can provide the funds to buckle down and make home improvements, especially when selling the home or refinancing isn’t a financially sound option.
However, if a homeowner got their current mortgage during a period of higher interest rates, today’s rates still may be able to offer a break.
Experts say there’s still plenty of opportunity into 2022 for homeowners to tap into the record amounts of equity, whether that be with a HELOC or cash-out refinance.