Is it time to repay a mortgage?

Domestic equity lines of credit have been declining for more than a decade. However, HELOCs will have to make a U-turn in 2022 as mortgage rates rise to their highest levels since 2019.

A home equity line of credit allows you to borrow against your own home equity. You can withdraw from it periodically and repay part or all of it, such as a credit card. People often use the flexibility of a HELOC to pay for home renovations.

What happened to HELOC?

HELOCs flourished during the housing boom. Homeowners had 24.2 million HELOC accounts in the first quarter of 2008, according to the Federal Reserve’s quarterly household debt and credit report. Eventually, the amount owed to HELOC’s balances reached $ 710 billion.

Go to the third quarter of 2021, the latest data, and it seems that HELOC has made its way to the stable. The number of accounts (12.8 million) was reduced by almost half and the rest ($ 320 billion) showed a similar decrease.

The slow and steady collapse of HELOCs began during the housing collapse, as previously inflated housing values ​​fell nationally and lenders avoided any risk. My wife and I saw it first hand. In June 2009, our bank banned us from using another HELOC that we had opened for half a dozen years, giving the reasoning that “the value of your home has dropped further.” My angry wife put a bill in the bank branch with a check to pay off the balance and close the account.

As home values ​​recovered in the decade following the collapse of homes, homeowners have amassed trillions of dollars in equity. Available-in equity reached $ 9.4 trillion in the third quarter of 2021, according to Black Knight, a mortgage and data technology company. However, HELOCs have not returned – yet.

Later home ownership, lower mortgage rates

I wonder if the stock lines faded in part because the banks did not focus on them as a new generation – millennials – started buying. If you’ve bought your first home in recent years, you may not know anyone who has HELOC. Or maybe your parents had a frustrating experience with a HELOC, as I did. If you are not exposed to HELOC ads, none of your friends have them or your parents abused them, you are unlikely to get them.

Cynthia Montgomery, Corporate Communications Director at Truist Bank, disagrees with my view that millennials despise HELOC. He says millennials buy homes later in life than previous generations. “This delay in home ownership has reduced the group of homeowners who may have considered HELOC for lending needs,” he said via email.

In addition, low mortgage rates have pushed stock lines into the background. Historically low mortgage rates “have prompted many consumers to opt for a mortgage refinancing over a mortgage,” Matthew Vernon, a Bank of America retail lender, said in an email.

Because HELOCs can bounce

Vernon talks about cash-out refinancing – a different way of exporting shares. While a HELOC is a second mortgage towed back to your original, a repayment refi leads by itself. Replace your original mortgage with a loan for more than you owe right now. You receive the difference in cash.

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Cash-out refinancing has skyrocketed in the pandemic era, when the average 30-year fixed-rate mortgage rate remained largely below 3.5%. However, mortgage rates are expected to rise in 2022, potentially approaching 4% by the end of the year. The last time the 30-year stable was consistently above 4% was at the end of 2019.

If your mortgage rate is below 3.5%, you will be reluctant to receive redemption refinancing as interest rates approach and exceed 4%. You may prefer a HELOC. HELOC allows you to maintain a low interest rate on your home mortgage while converting equity into cash. Rising mortgage rates are why I believe HELOCs will become relevant again in 2022.

What could hold HELOC back

The resurgence of HELOC is not certain. HELOC interest rates are floating, not fixed. They are linked to the key interest rate, which will increase each time the Federal Reserve raises the interest rate on federal funds. HELOC rates could rise by a full percentage point this year. The prospect of rising interest rates could make some homeowners wary of stocks.

Another possible obstacle: Lack of construction materials and skilled workers could force home renovations to be postponed, thus delaying the need for borrowing.

Decision between HELOC and refi-cash-out

You can compare a HELOC to a redemption refinance once you have two pieces of information:

  • How much money do you need for renovations (or whatever else you plan to spend).
  • How much do you currently owe for your mortgage?

Combine the numbers and use a mortgage refinancing calculator to calculate monthly payments at current interest rates. This is the estimated monthly cost of a redemption refinancing.

To calculate the minimum monthly payments on a HELOC, go to the mortgage computer with interest only and enter the total amount you intend to borrow in the top box and a $ 0 deposit in the next box. A typical HELOC has a loan term of 10 years with interest only and a loan term of 20 years with full amortization. Average prices are available on the current HELOC price page.

Combine your estimated HELOC payment with your current mortgage payment. Compare this to the estimated cash refinancing payment.

As mortgage rates continue to rise this year, the scales will move more and more towards HELOCs and away from cash refinancing. We will see a revival of HELOC. Even among millennials.

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About the Author: Holden Lewis is NerdWallet’s mortgage and real estate authority. He has been referring to mortgages since 2001, winning many awards.

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