Prices, Inventory Make Home Equity Borrowing an Appealing Option

Thursday, June 23 at 09:10 AM
Category: Personal Finance

The combination of low inventory and rising prices in the residential housing market is spurring an increase in homeowners utilizing the equity in their existing homes rather than purchasing new ones.

According to the National Association of Realtors, there was 4.7 months of housing inventory for sale in the U.S. in April, meaning it would take that amount of time for every house on the market to sell at the current pace of sales. A market is generally considered balanced when there’s five or six months of inventory.

The low inventory has resulted in increasing prices for many homes on the market. According to David Blitzer, chairman of the Index Committee for Standard & Poor, U.S. home prices in April were up 5.3 percent over the previous 12 months, more than twice the rate of inflation.

These developments have caused a growing number of homeowners to upgrade in a different manner, such as remodeling or making other home improvements. To do so, many homeowners are using tools like a Home Equity Line of Credit (HELOC).

A HELOC essentially is a home loan that allows the homeowner to borrow against the equity in their home, using their home as collateral. Home improvement is the No. 1 reason homeowners pursue a HELOC, although they are used for other reasons such as funding major purchases or expenses.

With mortgage rates expected to rise in the coming years, a HELOC can be an increasingly attractive reason to not buy a new home. The Mortgage Bankers Association’s May 10 prediction is that rates on 30-year fixed-rate mortgages will rise to an average of 4.5 percent in 2017 and 5.2 percent in 2018.

In today’s housing market, the definition of “new” is left in the eyes of the homeowner, and investing in and updating an existing home is a viable option as the inventory of “move up” homes remains tight.
 
Tags: Financial Education, Home Loans
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