“Trust, but verify,” isn’t just wise political advice, made famous by President Ronald Reagan. It’s also useful when evaluating financial news.
Recently, I have read with interest a spate of stories about home equity lines of credit (HELOCs). These financial products are essentially a second mortgage in which you can convert the market value of your home into cash. Financial periodicals are both heralding these instruments for giving consumers flexibility and decrying them because they may add risk to the financial system.
To verify whether consumers are more interested in HELOCs, I checked with several of my firm’s loan consultants who work in branches across the country. They talk directly to consumers every day, and it’s worth noting their insights on this topic that has captured the financial literati.
First, it’s clear that consumers are interested in debt consolidation. Rising home prices have reduced affordability. Demand has also fallen considerably. At the same time, many homeowners have built up equity in their homes, which has been a net positive as home prices have increased.
We’ve found that homeowners tap this value to upgrade their current residences — rather than trade up to buy a new home. Since mortgage interest rates are still relatively low, home equity loans are also being leveraged to consolidate debt, to pay off even more expensive instruments like credit card, auto, and personal loans. This is a welcome development as consumers can get on more solid financial footing.
Moreover, “the need for HELOCs has decreased because there has been an increase in loan programs that have lower down payments,” said Lindsay Simmons, a loan consultant based in Reston, Va.
Second, consumers are laser-focused on rates. “Most customers who ask about HELOCs are worried about fluctuating interest rates,” says Katie Simmons Hickey, a sales manager who is also based in Reston. “They love fixed rate options that some mortgage providers are offering. We get asked about the risks and costs of HELOCs, and many are considering them as emergency options, if they need money.” Consumers are comparison shopping for the best deal they can find among mortgage providers.
Read: Lax standards for home equity lines of credit echo bubble-era madness
Consumers frequently ask our loan consultants about the pros and cons of HELOCs. It’s incredibly important that all mortgage providers answer these questions thoughtfully. Making sure customers understand the risks associated with these products is critical to maintaining a vibrant housing market and prudent financial system.
Third, consumers are evaluating other products besides HELOCs.
Indeed, HELOCs aren’t the only way to convert home equity into cash. For example, consumers are considering bridge loans, “trying to tap their home value with fewer contingencies of a HELOC,” said Josip Capelj, a loan consultant in Detroit.
“Many homeowners who bought their property awhile ago have sizeable equity positions,” said Tim Cooper, a loan consultant based in Chico, Calif. “They’re also considering cash-out refinancing.”
Bottom line: Consumers aren’t rushing to take out HELOCs en masse. They are carefully considering their options, and we’re with them every step of the way.
Sanjiv Das is CEO of Caliber Home Loans, one of the largest housing specialty firms in the U.S.. He was CEO of CitiMortgage from 2008 to 2013.
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