"I'm applying for a mortgage loan in California and want to know how much I…
A housing industry report published recently showed that home equity loans and home equity lines of credit (HELOCs) have become increasingly popular in California.
In 2022, it seems that more and more homeowners have used equity loans and HELOCs as a way to convert some of their equity into cash or credit. This trend is partly due to a rise in mortgage rates that began in early 2022.
Home Equity Loans on the Rise in California
Last month, the Urban Institute’s Housing Finance Policy Center published its latest “Housing Finance at a Glance” report. Among other things, this report sheds light on a variety of home financing and mortgage-related trends nationwide.
According to their latest report, the use of home equity lines of credit (HELOCs) has become more common in California and across the country. They also reported the rising popularity of “regular” equity loans. Both of these financing strategies appear to be on the rise in 2022.
Here are the numbers. During the period ranging from January to May of 2022, the combined volume of both home equity lines of credit (HELOCs) and traditional equity loans rose by 47%. That’s when compared to the same timeframe a year earlier.
Rising mortgage rates play a role in all of this, and we’ll cover that in a moment. But first, let’s talk about the key features and differences between these two products.
Differences Between HELOCs and Equity Loans
If you’ve never used a HELOC or home equity loan before, the terminology can be a bit confusing. They sound similar, and they both allow homeowners to convert equity into useable funds. But there are some important differences you should know about.
Home Equity Loan
A home equity loan is a type of loan that’s secured by the property. Homeowners who use this financing method receive a lump-sum payment for a specific amount, and then repay it over time. In most cases, the payments are fixed (unchanging) and spread out over the life of the loan.
The amount a person can borrow when using a home equity loan will depend on several factors. These include the borrower’s income, credit history, and the current market value of the property being used as collateral.
Home Equity Line of Credit (HELOC)
A home equity line of credit, or HELOC, also allows homeowners to tap into their equity. But it works differently from the “standard” equity loan explained above.
In fact, a HELOC works much like a credit card. California homeowners can use a HELOC to open up a line of credit, and borrow from it as needed using a check or card connected to the account. But unlike a regular credit card, a HELOC is secured by the value of your home.
HELOCs usually come with a variable interest rate that can rise or fall with market conditions. This distinguishes them from a regular home equity loan, which usually has a fixed interest rate. Different products, different features.
Here again, the ultimate goal is the same. The HELOC allows homeowners to convert some of their property equity into credit, which can be used for a wide variety of purposes.
Higher Mortgage Rates Play a Role
During the second half of 2022, many homeowners in California have turned to home equity loans and HELOCs, as opposed to refinancing. Mortgage rates have risen since the start of this year, and that has had a direct impact on these trends.
Some homeowners in California have an existing mortgage rate that’s lower than current market rates. As a result, they might be less inclined to use cash-out refinancing, instead choosing to hang onto their relatively low rates.
To quote the August 2022 Urban Institute report mentioned earlier:
Cash-out refinance volumes are likely to remain muted for the foreseeable future as most borrowers will be reluctant to give up their ultra-low rates. This suggests that demand for HELOCs and home equity loans will remain strong, especially given the supply shortage and substantial equity build-up for existing homeowners.
During the third week of September 2022, the average rate for a 30-year fixed mortgage rose to 6.02%. That’s based on the nationwide weekly survey conducted by Freddie Mac. One year earlier, 30-year mortgage rates were averaging around 2.86%. So they’ve risen quite a bit over the past 12 months.
Clearly, these trends have influenced homeowners who are looking for ways to cash in on their home equity.
California Homeowners Have Gained Equity
A lot of California homeowners are now in a better position to convert some of their equity into cash — regardless of how they do it. Home prices statewide rose substantially over the past two years, giving homeowners more equity to work with.
According to Zillow, the median home value for the state of California rose from around $571,000 in August 2020, up to $775,000 by August 2022. That’s a gain of more than $200,000 in just 24 months.