Much of the trouble that the housing bubble eventually caused
didn't come directly from the stratospheric rise and subsequent
meteoric fall of home prices. Rather, it came from the ability of
homeowners to tap their sudden increases in home equity rapidly
and efficiently through home equity loans and lines of credit.
The ease with which one could borrow up to and sometimes in
excess of the entire amount of equity you had in your home coined
the term "
After a sudden halt to home equity activity during the
financial crisis, homeowners have struggled over the past several
years to build up any equity in their homes. Yet now, with home
prices having hit bottom in some markets and with homeowners
having had a few years to pay down debt,
equity is suddenly available again
-- and borrowers are increasingly taking steps to tap it.
They're back, baby!
As banks have been reporting fourth-quarter results over the past
couple of weeks, they've shown higher levels of activity in the
home equity space.
's TD Bank,
were among banks showing substantial increases, with JPMorgan
posting a jump of 35% in home equity lines of credit during the
quarter to $373 million in originations. TD Bank said that the
number of home equity originations jumped 27%, while M&T's
dollar volume of originations saw similar gains.
Overall, though, homeowners have been more interested in
locking in low rates via home equity loans rather than accepting
the variable rates that most home equity lines of credit offer.
That's likely because fixed rates are so low that you don't get
much benefit from accepting the risk that a variable-rate line of
credit involves. TD Bank,
, and other banks have had to add ways to convert part or all of
their home equity lines into fixed-rate loans in order to entice
How to stay prudent
Just because home equity loans are available with attractive
rates doesn't mean that you should go out and grab one yourself.
In fact, even if you want one, you may find you can't get a
, which banks can package and sell to Fannie Mae or Freddie Mac
for eventual securitization as mortgage-backed securities, home
equity loans and lines of credit typically remain assets of the
bank that originated them. As a result, banks have a far greater
incentive to ensure that their quality is as high as possible,
and that means requiring more information and maintaining
stricter guidelines even than what Fannie and Freddie now want
for traditional mortgages.
Still, you may find it makes sense to try to go the home
equity route. For one thing, origination costs are often far
lower for home equity arrangements than for
, with many banks willing to pick up fees for appraisals and
other closing costs in exchange for a commitment not to close the
line or pay off the loan within a certain number of years.
Moreover, the process can be simpler than for a mortgage,
resulting in faster turnaround times for those who qualify.
Most important, it's essential that you understand how
interest rates work on the loans. For lines of credit, find out
which interest rate your line's finance charges are based on, and
how quickly your rate may go up if that benchmark starts to rise.
For home equity loans, make sure you're comfortable that you'll
be able to make monthly payments and repay any balloon amount
outstanding at maturity. With either type of home equity
borrowing, leaving yourself open to refinancing risk down the
road is a bad idea, given that the 10-year Treasury's yield has
hit the 2% level and could see further increases.
Don't get stuck again
Ten years ago, after the tech bust, bumper stickers in Silicon
Valley had pleas for just one more bubble. Homeowners may be
wishing the same thing, but that doesn't mean you should go back
to using your home as an ATM again. Be more prudent with your
home equity, and it can serve you well as a valuable tool rather
than a catalyst to serious financial trouble.
Smart lending practices helped Wells Fargo survive the
financial crisis. Today, Wells is the same great bank as ever,
but with its stock trading at a premium to the rest of the
industry, is there still room to buy, or is it time to cash in
your gains? To help figure out whether Wells Fargo is a buy
today, I invite you to download our premium research report from
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Fool contributor Dan Caplinger owns warrants on JPMorgan
Chase and Wells Fargo. You can follow him on Twitter
@DanCaplinger. The Motley Fool recommends Wells Fargo. The Motley
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