Despite rising interest rates, applications for home equity loans, such as home equity lines of credit, have remained consistent and even increased some throughout the past year, some Spokane-area lending experts say.
David Flood, chief lending officer at Liberty Lake-based Spokane Teachers Credit Union, says that in a rising interest rate environment like there is now, people are more inclined to go with fixed-rate home equity loans rather than HELOCs. However, many credit unions, including STCU, offer the option to fix a portion of the HELOCs’ interest rate.
In 2017, the credit union completed 1,359 home equity loans, up 28 percent compared with 1,061 home equity loans in 2016. That trend is projected to continue this year, says Flood.
With home equity loans, homeowners borrow against their home’s equity. HELOCs are a type of home equity loan. The other type is a fixed home equity loan, which is a term loan, not a line of credit. HELOCs operate with a variable interest rate, and fixed home equity loans generally have fixed interest rates. Unlike refinancing mortgages, home equity loans typically don’t have origination fees.
Chris Simchuk, assistant vice
president of retail lending at Spokane Valley-based Numerica Credit Union, says the credit union offers HELOC borrowers the option to fix their rates for up to 15 years.
“You can fix up to three advances in seven-, 10-, or 15-year terms,” says Simchuk. “So, if you’re thinking rates are going to rise in the future, you can hedge against that by fixing your balance.”
Kelly Hawkins, spokeswoman for Spokane Valley-based Numerica Credit Union, uses the example of a homeowner taking out a $20,000 HELOC loan. A borrower could take out a fixed-rate portion of that loan, such as $10,000 for a project, but the rest of the funds could be on a variable interest rate.
Flood lists a couple reasons home equity loans are thriving amid rising interest rates.
“What’s really driving up people applying for home equity loans is the combination of first-mortgage rates going up and increased home values,” he says.
When first-mortgage rates rise, they’ll look more toward home equity loans to borrow instead of refinancing, say both Simchuk and Flood.
Flood says refinancing a mortgage involves a borrower replacing one mortgage with another loan. People refinance their mortgages for numerous reasons, including to finance home-improvement projects and adjusting mortgage rates, which can lower monthly payments. However, when mortgage interest rates rise, people are more inclined to take out a home equity loan. Refinancing mortgages requires homeowners to change their entire mortgage terms. Home equity loans borrow against the home’s equity, meaning the mortgage is left alone.
STCU’s home equity loan rates are tied to a survey of prime lending rates as conducted by regularly by the Wall Street Journal, Flood says. When that index rises by a quarter of a percent, STCU increases its rates, he says.
The prime rate is the rate which large financial institutions charge their best customers.
As of last week, the WSJ prime rate, which went into effect Dec. 14, was 4.5 percent, the highest rate in nearly a decade, historical data shows.
Simchuk says Numerica’s home equity loan rates also are tied to that index.
“As the Wall Street Journal prime index increases, so do HELOC rates,” he says.
Numerica has seen an increase in HELOC applications, even with the rising interest rates, he says.
Separately, Flood says it’s important for people to consider the impact taking out a HELOC may have on their finances.
“With a variable product, you could have a tight budget, and every time the rate increase, it increases your payment, so it can make your budget even tighter,” he says.
Like Flood, Simchuk says increased home values contribute to that loan demand. That’s because of high housing demand and low inventory, he says. Equity increases enable homeowners to borrow more in HELOC loans.
The January home sales report issued by the Spokane Association of Realtors says home inventory—the number of homes on the market through the association’s Multiple Listing Service—dropped 18 percent compared to the January 2017 inventory. Additionally, the number of homes sold through the MLS rose 22.4 percent, to 464, compared to 379 homes sold in the year-earlier month.
Simchuk says other reasons for the high HELOC demand could be attributed to consumer confidence, how easy applying for home equity loans can be compared to applying for mortgages, ease of access to loan funds, and the ability to borrow continually against the HELOC for a certain number of years.
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