Some lending and real estate experts here say that Spokane-area homeowners are pursuing home equity lines of credit, or HELOCs, at rates that mirror the flourishing housing market.

“I think definitely over the past 12 months, the HELOC product has become more popular for sure, because people recognize that the real estate market is showing good appreciation here,” says Linda Underwood, Spokane-based regional president of Minneapolis-based U.S. Bank.

A HELOC is a type of home equity loan in which a borrower’s home serves as collateral for a line of credit. Unlike a fixed equity home loan, a HELOC typically has a variable interest rate.

Sean Bresnahan, a Spokane-based vice president and loan products manager for Portland-based Umpqua Bank, says the bank also has seen a bump in credit line applications over last year.

“Production has been very good these last several months,” Bresnahan says. “People are looking to do some home improvement projects so you’ll see more (HELOC applications) in spring and summer and even into the fall.”

Underwood says loan officers must take into account several factors when helping a prospective borrower decide whether to choose a fixed equity home loan or a HELOC.

“The factors that usually come up are payment terms and interest rate risk, as well as the purpose,” she says. “If the purpose is ‘just in case,’ then obviously a line of credit would be probably more appropriate than actually borrowing money and putting it in a savings account.”

Many borrowers use a HELOC to make improvements to their home, thereby increasing their home’s equity. However, borrowers aren’t limited to one purpose when accessing a HELOC; some use it to pay their child’s college tuition or to pay off medical bills.

“Some people do use their home equity lines to refinance credit card debt,” Bresnahan says. “Your home equity lines of credit will have lower interest rates than your credit card.”

Underwood says those who use a HELOC typically are confident in their home’s equity.

“I don’t know necessarily what it’s used for most, but I can say with confidence that people apply for (HELOCs) mostly when they feel like they have good equity in their home,” Underwood says. “That means that they’ve paid down their first mortgage … or, alternatively, the property has increased in value and they’re benefitting from having made an astute investment prior, when they bought it.”

Bresnahan says that despite rising interest rates, applications for HELOCs have continued to increase, which he says indicates a strong economy.

The most recent home sales report from the Spokane Association of Realtors appears to reaffirm that confidence. 

Closed sales for May totaled 758, down about 2.4 percent compared to May 2017 sales, but the average price was up by 16.5 percent, at just over $265,000. Inventory, which has been trending downward since November, remains low at a 1.8-month supply of 1,389 properties. A four- to six-month inventory is considered a balance between supply and demand.

“We’re still in a sellers’ market,” Keller Williams broker and Spokane Association of Realtors President Ken Sax says. “We’re starting to see sellers being overconfident in the market and overpricing their home. I don’t think (home prices) will come down anytime soon, and that’s just a matter of supply and demand.”

Ken Lewis, broker and owner of Spokane Valley-based Berkshire Hathaway HomeServices, says the housing market has quieted only slightly in recent weeks.

“It’s not quite as hot as it was a little earlier, but it’s still hot,” Lewis says.

Lewis, who has nearly 50 years of experience in real estate, says HELOCs can be a useful tool for those looking to sell a home in order to buy a different home, especially in a fast-moving market. A buyer can use the HELOC on their existing home for part of a down payment on the new home, which Lewis says can help them purchase the new home faster - an important consideration in a fast-moving market.

“If they find the right house, if they’re pre-approved for a HELOC, they can buy that house instead of missing out,” he says. 

A HELOC also can be a resource for those seeking to “piggyback” a conventional mortgage, Underwood says. Piggybacking is a method for buyers who may not have enough down payment savings or who want to avoid private mortgage insurance. 

In a typical piggyback mortgage, a buyer takes out two separate loans, one of which is usually set at 80 percent of the home’s value, the other at 10 percent—the remaining 10 percent comes out of the buyer’s pocket, or, in some cases, from a HELOC.

“If you think about the purchase market in the residential real estate space, a conventional mortgage is typically 80 percent loan-to-value, and customers have to come up with 20 percent to avoid paying private mortgage insurance,” Underwood says. “In some instances, a home equity line of credit can take that last 10 percent that they need to come up with so that they only need to come up with 10 percent down and then they can avoid the private mortgage insurance.”

HELOC borrowers need to be certain they understand how the line of credit works, Sax says.

“Where consumers have gone sideways on HELOCs is, first, for a seller, understand you have to pay that back when you sell the house,” Sax says. “For a buyer, that’s not necessarily cash. We hear these buyers saying, ‘Oh I’m a cash buyer,’ and that’s not necessarily true.”

Borrowers should also remember that the economy will not always be as encouraging as it has been lately, Underwood says.

“Just because we’re in a period of time where there’s a lot of consumer confidence and there’s a lot of activity around equity lending, we always need to be mindful that it’s not a linear relationship. It’s not always going to be improving,” Underwood says. “There’s going to come a time when the cycle will correct itself. At that point, it’s really important that all of us, whether you’re a borrower that has a home equity line of credit or you’re the bank advising your clients that who to take out new lines of credit, that we really have a good understanding of where the value of the home is and what equity might actually be in the home.”

For now, however, Berkshire Hathaways’s Lewis predicts the market will remain active. 

“I see the future of the housing market being pretty strong for quite a while yet,” Lewis says. “The increase in prices may slow a little bit, but I don’t see any kind of short-term end to how good the market is.”