NEW YORK (MainStreet) Tolerance for home equity lines of credit is returning, despite playing a role in causing the 2008 mortgage.
Credit reporting agency Equifax reports home equity lines of credit, known as HELOCs, have risen 8% year-to-date as of February, representing a five-year high.
In the years leading up to the 2008 financial crisis, HELOCs were a helpful tool for consumers, as they allow homeowners to tap into their home's equity like an ATM to be used for home improvements, college tuition or paying off credit card debt.
As long as home prices were rising, which they were, homeowners could fully take advantage of this unrealized wealth known as equity.
When the housing market crashed, homeowners found themselves in over their heads, as primary mortgages and home equity lines of credit started to exceed the home's value.
While plenty of measures have been taken by lawmakers to prevent a future recession, consumers and banks still haven't learned their lessons. HELOCs remain a risky financial tool that puts you at risk for foreclosure should you be unable to pay back the funds drawn from the line of credit. Banks are also incentivizing higher HELOC amounts by offering lower interest rates.
"The CFPB [Consumer Financial Protection Bureau] added regulations for the traditional mortgage market, but not for the HELOC market," says Dani Babb, founder and CEO of The Babb Group.
For consumers looking into HELOCs, there are plenty of things to watch out for. First, be aware of the fees involved, which typically include an appraisal fee, an application fee to run your credit and a closing fee, which can range from a percentage of the HELOC amount or a flat fee.