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Homes Once Again A Piggy Bank
Homeowners are opening their favorite piggy bank again — their homes.
As home values rise faster than expected, that increased homeowner wealth suddenly seems more enticing. Home equity lines of credit, known as HELOCs and often serving as second loans, allow homeowners to pull cash out of their homes when they need it. HELOC volume is now up 21 percent in the past two years, to the highest level since 2008, according to Moody's. It is still nowhere near its housing boom level, when many people treated their homes like ATMs, but the trajectory is definitely pointing higher.
Borrowers are also putting smaller down payments on home loans now, starting with less home equity either to save cash or because they can't afford anything more. To put it in perspective, before the last housing boom, the median down payment was just over 7 percent. It then dropped to 3 percent during the height of the boom, as lenders offered all kinds of "creative" loan products that required little to no down payment.
Homeowners are clearly leaning toward more leverage, but they are doing so in a far different environment than in 2006. Mortgage underwriting is far stricter, especially for home equity loans, and borrowers must prove their ability to repay loans, including all financial documentation. Home equity continues to rise steadily, according to the Federal Reserve Board, and it is still rising faster than borrowers are withdrawing it.
Cash out refinances are also making a big comeback as homeowners are able to take advantage of rising home values to refinance their current mortgage and taking equity out. These are mortgages that are in the first lien position. In these cases, the borrow is often also removing their monthly private mortgage insurance. Even with slightly higher mortgage rates than a year ago, their monthly mortgage payments are often times much lower given the absence of the monthly PMI component.
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