NEW YORK (MainStreet -- Homeowners are borrowing money against their houses as the economy is showing additional signs of improvement with low interest rates and a rise in home prices.
Home equity lines of credit (HELOCs) and home equity loans (HEL) rose by 8% in the first quarter from last year, according to Inside Mortgage Finance, an industry newsletter. A few lenders reported home equity activity increase during the first quarter of 2014, the newsletter said.
As more lenders are making these loans available, homeowners armed with extra equity can access additional cash for various discretionary needs or start on home improvement projects typically at a lower interest rate than other credit options.
Citizens Financial Group, the Providence, R.I. financial institution, said it reported a 30% increase in its 12-state footprint since May 2013.
The increase is likely driven by a combination of rising mortgage rates, which have slowed down home refinancing and the real estate market stabilizing, resulting in home values increasing, said Phil Rizzuto, senior vice president of home lending solutions for Citizens Financial Group.
"We are seeing borrowers feel more comfortable taking out loans to handle home improvements or consolidating other debts then they have in recent years," he said.
Citizens Financial Group has seen a steady increase in home equity loans and lines of credit over the past year across its entire footprint with a larger increase across its Mid-Atlantic and Midwest markets. Those markets were impacted more during the financial crisis than some other ones. During the past year, the bank has seen improvements in those markets.
Homeowners are choosing to get an HEL or HELOC because mortgage rates are on the rise now and many of them took advantage of refinancing to a lower rate previously, Rizzuto said.
"Combined with home values being on the rise, there appears to be renewed interest on the part of homeowners that now is a good time to make general home improvements or to pay down debt," he said.
A home equity loan could be a better option for a homeowner who wants to fund a specific project or consolidate a specific debt, Rizzuto said. For homeowners who need an extended line of credit to complete multiple improvement projects, a home equity line of credit will likely be more appealing to them.
"In general, we are seeing customers gravitating more toward home equity lines of credit because of the flexibility they offer," he said. "As each borrower has different needs when looking to apply for a home equity loan or line of credit, it is best they consult current rates at or visit a branch for additional information."
A home equity loan is at a fixed rate, while a HELOC has a variable rate, said Rick Huard, senior vice president of retail lending at TD Bank. Some lenders like TD Bank also offer a fixed rate option which allows homeowners to keep the convenience of a HELOC but offers the consistency of a fixed rate, he said.
"For a homeowner to decide if a HELOC is right for them, they should determine what they are going to use it for and what amount is needed," Huard said. "As borrowers request home equity information or apply for a loan or line of credit, lenders may ask why they want a home equity loan or line to help determine the best loan option for them."
Borrowers should look for the HELOC plan that best meets their needs and pay close attention to the terms and conditions of various plans, including the annual percentage rate (APR) and other fees and charges, he said. The APR of a loan takes into account the interest rate and all fees paid, whereas the APR for a line of credit takes into account only the interest rate.
"Borrowers should not simply compare the APR of a home equity loan to that of a home equity line of credit when weighing the best option for them," Huard said.
Similar to a mortgage, a HELOC will require documentation and income verification. Borrowers can speed up the process by providing necessary paperwork such as pay stubs, W2s, tax returns for self-employed homeowners, tax assessments, proof of homeowners and flood insurance, he said.
--Written by Ellen Chang for MainStreet