The number of loans is creeping up as the area's median home values increase.
As the new year slid solidly into place, the real estate market in Franklin County was deemed “very hot” by online real estate database Zillow. That sizzling market, in turn, has ignited another hot phenomenon—home equity loans.
Median home values as of March had risen 7 percent over last year. And home equity loan applications for lenders such as Telhio Credit Union have kept equal pace and grown in size, says Derrick Bailey, the company’s chief sales officer.
“We are seeing an uptick in application volume, year over year, of roughly 7 percent,” Bailey says. “In addition, we are seeing larger loan amounts. The average loan size has increased by 10 percent, year over year.”
The equity of someone’s house is often their most valuable asset. In other words, the equity in a home equals the value of the home minus the balance owed from any mortgages or liens.
Home equity loans are comparable to a second mortgage, and they are an important resource for homeowners in urgent need of a pile of cash to pay for home improvements, unexpected emergency repairs, college tuition or any number of sizeable bills. Homeowners looking to sell their properties might even tap the equity in them to make upgrades before putting a house on the market.
Homeowners seeking these loans can opt for a lump sum of cash up front and pay it back over time with fixed payments, or they can apply for a line of credit for the maximum amount available but only borrow what they need from that amount.
Fixed interest rates are limited and can be higher in cost, so they are often not as popular, Bailey says.
“Typically, homeowners must have 20 percent equity to get a home equity line of credit,” he says. “We do have niche products if a member needs to borrow more than the value of the house, but that is a term loan, not a line of credit.”
With the hot Central Ohio market and a lower inventory of available housing, bankers are seeing more people staying put and applying for equity loans to improve their property.
The home equity line of credit is the most flexible because homeowners have control over their loan balance and thus, their interest costs because they pay interest only on the amount they actually use. Typically, these loans are the most popular, says Dennis Maag, a senior lending manager for Chase Bank.
“For instance, if you do a line of credit for 10 years, you can take out the money you need over that period, but not after that,” Maag says. “People get the longest line they can get up front, but don’t use the whole line. A lot of homeowners do this in case they need the money versus knowing they need it.”
Lenders, however, are likely to caution homeowners not to use their home equity like an ATM, but rather to upgrade property or use it to improve their family’s lives in some way, such as using the equity to help pay college tuition.