HELOCs Are Back – But Are They Safe?

Significant increase in lenders offering HELOCs, with more than $156 billion in credit recently extended. HELOC lending is up 24 percent from 2014 and more than 200 percent from 2010.

NEW YORK – April 19, 2016 – As home values steadily improve, more homeowners become comfortable with tapping into their home equity through a home equity line of credit (HELOC).

According to CoreLogic Inc., there has been a significant increase in lenders offering HELOCs, with more than $156 billion in credit recently extended. HELOC lending is up 24 percent from 2014 and more than 200 percent from 2010, when home equity borrowing hit its lowest point.

However, loan volume, while strong, still doesn't measure up to the level of activity that peaked in 2006, just before the Great Recession.

KeyBank's list of best practices for owners considering a HELOC

• "Be assured that HELOCs are a safe and workable way to access cash to finance remodeling and free up finances for other use such as paying tuition," the bank says.

But it notes that some homeowners took advantage of their easy-to-tap home credit before the housing meltdown, leading them to owe far more on their homes than their market value after it declined.

• Know the difference between a HELOC and a home equity loan.

A home equity loan is a lump sum typically borrowed for a major one-time expense, such as consolidating bills or a one-time home renovation project. Loan payments are made in equal amounts over an established period of time, just as they are for a primary mortgage.

A HELOC accesses home equity on an as-needed basis, a bit like writing a check that's funded through existing home equity rather than a checking account. It's best suited for ongoing needs such as home upkeep or to manage the costs of a life-changing event.

HELOC payments are based on the amount of money accessed from the line of credit. An owner may be approved for access to $20,000 in home equity, for example, but only tapped into a small percentage of that amount.

Talk to a tax attorney or accountant for perspective on whether HELOC payments are tax deductible, KeyBank suggests.

• Talk to various lenders about their HELOC and home equity loan products and get a good understanding of interest rates (variable or fixed) and repayment schedules.
• Relationships can make a difference. Working with a lender that already handles your mortgage, car payment or deposits might make a difference when it comes to fees and closing costs.
• Consider a line of credit that is twice as much as you might need so your credit score doesn't take a hit.

Credit scores are affected by credit utilization – literally how much credit someone can access – and a credit score might be lowered if a homeowner uses more than 50 percent of available credit. While there's a temptation danger for some owners to have easy-to-access, pre-approved funds, a higher-value HELOC doesn't cost more since interest is charged only on the funds actually taken out.

• Prepare to borrow. Owners interested in a HELOC should check their FICO score and gather paperwork and documentation, such as W2 forms and pay stubs. Before applying, owners should decide the maximum amount they'd be comfortable paying back each month.
   
• Consult with legal, tax and/or financial advisors. These HELOC considerations are presented for informational purposes only and should not be construed as individual tax or financial advice, KeyBank notes.

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