Karen Kemmerer
 
Karen Kemmerer
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HELOCs Go Beyond Home Improvements

December 10, 2014 4:21 am

While half of homeowners who have a home equity line of credit (HELOC) acquired the loan for home renovations, an increasing number of homeowners rely on the loan for other needs, according to a recent Consumer Borrowing Index survey from TD Bank. Research from over 1,350 U.S. homeowners with a HELOC provides insight into those needs, along with usage and perceptions of the loan.

"We're seeing an increasing interest in HELOCs this year, suggesting a rebound in consumer confidence related to rising home values," said Michael Kinane, Head of Mortgage and Consumer Lending Products, TD Bank. "Using this type of financing to add value to your property is a strategic move when it comes to today's real estate market. HELOCs currently offer consumers the convenience and flexibility to borrow what they need at a better interest rate than most other lines of credit."

A HELOC is secured by a consumer's home and typically requires 80 percent equity. According to the Index, 53 percent of homeowners report the value of their home has increased within the past few years, meaning consumers have more equity in their homes to borrow. The survey also revealed that 30 percent of homeowners are applying for a HELOC of $100,000 or more, though the average loan secured is only $87,000. Those who shopped around tended to get a higher value loan. Additionally, individuals who went with their primary financial institution but did consider other lenders secured an average HELOC of $92,000, or $5,000 more than those who only considered their primary financial institution.

According to the Index, the top motivators behind acquiring a HELOC are:
  • Debt consolidation (29 percent)
  • Major home purchases (24 percent)
  • Emergency funds (19 percent)
  • Education costs (20 percent)
The Index also found that consumers are often using HELOC funds for expenses beyond those originally intended. For instance:
  • While 24 percent of HELOC borrowers used the loan for emergencies, a smaller 19 percent actually anticipated using it that way.
  • Twenty-seven percent purchased a new vehicle, while only 21 percent reported they intended to use the loan for this reason.
  • Although 18 percent of borrowers used their HELOC for medical and healthcare expenses, a slightly smaller 14 percent had actually anticipated using the loan for this reason.
Despite the popularity of HELOCs, there is still uncertainty and misunderstanding among many homeowners regarding the terms and conditions of their loan. The Index found:
  • Nearly half (47 percent) of consumers are paying some form of HELOC fee, such as an annual fee (30 percent), origination fee (30 percent) or prepayment fee (15 percent). However, one in five homeowners are unsure if they are paying fees.
  • Half of those surveyed do not know if they have any fixed-rate opportunities during their draw period, which on average is between five and 10 years.
  • The majority of millennials (59 percent) surveyed think that a HELOC interest rate is higher than interest rates for a student loan; 43 percent believe HELOC rates are higher than credit card interest rates.
Source: TD Bank

Published with permission from RISMedia.

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