Numbers bring a rise in home equity loans
Values rising, rates low; bankers say earlier excesses won’t be repeated
Borrowers once again are using their homes as a quick source of cash to pay for kitchen renovations, college educations, and cars — and even to gain a competitive edge when making offers on a new house.
An improving economy, rising home values, and low interest rates have spurred a resurgence in home equity borrowing in Massachusetts and throughout the country. Banks are again promoting these loans — which all but dried up after real estate values collapsed several years ago — and consumers, sitting on appreciating assets, are again seeking them.
Josh Robbins and his wife took out a home equity line of credit a few weeks ago at Eastern Bank. The value of the couple’s Norwood home, which they bought in 2012, has increased by tens of thousands of dollars, allowing them to borrow against the equity to help pay off Robbins’ law school loans. The student loans carry about an 8 percent interest rate, double the rate Robbins will pay on the home equity line.
“I have a number of small student loans; some of them are a killer,” said Robbins, 30. “We’re thinking of starting a family. We wanted to knock off some of my debt before we started having to save for their college.”
Local banks say home equity borrowing has jumped as much as 40 percent from a year ago as customers, in addition to paying off debts that carry higher interest rates, take on home improvements that were put off during the last recession, discharge costly medical bills, and help their children buy homes.
One customer, said Jane Lundquist, executive vice president at Rockland Trust Bank, tapped the equity from his longtime home to make a cash offer on a new one, an advantage in today’s hypercompetitive housing market.
He will pay off the home equity loan when he sells his old house.
Home equity rates are averaging 4.5 percent, but customers with good credit and significant equity can find rates under 3 percent, according to bank officials and analysts.
Typically, home equity loans carry lower rates than other loans because they are secured by the property, but they are particularly low today because they are tied to the Federal Reserve’s benchmark short-term loan rate, which policy makers have held near zero since 2008.
The last time the market experienced the combination of low rates and rising values it led to disaster.
During the housing boom of a decade ago, many homeowners cashed out equity almost as fast as values rose, using their homes, as economists put it, like ATMs. When values began to fall, they were left with more debt than their homes were worth, contributing to the foreclosure crisis, the overall financial crisis, and ultimately the nation’s worst recession in 70 years.
Few bankers and analysts expect the home equity market to return to those days of irresponsible borrowing and lending. Home equity borrowing in Massachusetts increased 7 percent in 2013 to just over 37,000 loans, but that was one-third of the more than 100,000 home equity loans made in 2007, according to the Warren Group, a Boston real estate tracking firm.
Lenders say they have learned their lessons.
In general, banks have tightened credit standards, limited loan amounts, and resumed doing thorough appraisals, sending appraisers to physically inspect properties, rather than relying on computer-generated estimates.
“It’s far more responsible,” said Lee Howlett, a vice president with Strategic Information Resources, a Springfield firm that does appraisal and title work for lenders.
Home equity lending is also increasing along with Massachusetts home values, which have risen about 17 percent over the past two years to a statewide median of $340,000 in May, just below the $352,00 reached in 2005, at the peak of the boom.
Regional lenders, including TD Bank and Citizens Bank, report double-digit percentage increases in home equity loans nationwide and in Massachusetts.
Rockland Trust says that home equity borrowing has jumped 30 percent from a year ago. Eastern Bank says its home equity lending is up 40 percent.
As attractive as low rates and ready cash may seem, homeowners need to be cautious in taking out home equity loans, said Polyana da Costa, a senior mortgage analyst with Bankrate.com, a consumer finance website. Many of the loans have floating interest rates that will begin to rise as the economy improves and the Federal Reserve raises short-term rates.
“It’s a good loan,” da Costa said, “if you borrow responsibly and know what you’re doing.”
Victor Carvalho, 47, a Weymouth resident, said the risks of using his home as collateral were certainly on his mind when he recently decided to take out a loan.
Carvalho said his family is making sure they have enough savings to help pay off the home equity debt. But the low interest rates are attractive, especially as one of his sons prepares to go to college next year.
Carvalho, who got his loan from Rockland Trust with a 2.74 percent interest rate, said he wanted to clear some of his smaller debts that carry higher interest rates and have the home equity line of credit at the ready to help pay for college costs.
“We wouldn’t do anything that wouldn’t be a benefit or be a savings,” Carvalho said. “If something was to go drastically wrong, I wouldn’t want to be upside down.”