That’s more expensive than the typical 30-year mortgage, an interest rate that generally tracks the yield on the 10-year Treasury note. The average rate on a new Heloc was 6.45% as of Sept. 30, according to Informa Financial Intelligence. Borrowers looking to exchange equity for cash in a refinancing are being offered an average rate of 3.99%.
When mortgage rates are at least 1 percentage point lower than the rate on Helocs, borrowers looking to pull equity from their homes typically opt for a cash-out refinancing over a home equity line of credit, said Rutger van Faassen, a vice president of consumer lending at Informa. Add to that the fact that a new mortgage offers a fixed rate instead of the variable Heloc and the option becomes even more attractive, he said.
Unsecured personal loans pose another threat to the Heloc business. Many online lenders offer cash in a day, and years of quick turnaround times with their online purchases have conditioned consumers to expect speed when they access credit, said Mark Ford, head of personal lending and card solutions at SunTrust Banks Inc.
Home equity lines require a daunting pile of paperwork and the added headache of a new home appraisal. Typically it takes about 45 days from the date of the application for a borrower to get the cash, according to Informa. Another obstacle: Borrowers who default on a Heloc, unlike on a personal loan, probably lose their homes.
Lauren Anastasio, a financial adviser at Social Finance Inc., the lender better known as SoFi, said her clients often pick personal loans over Helocs, despite the higher interest rate, because of the quicker processing time. A recent survey by J.D. Power found that consumers rated online lenders above home equity providers when it came to customer satisfaction.
Banks are responding. Citizens Financial Group Inc. has reduced its processing times by half, to 35 days, according to Brendan Coughlin, head of consumer deposits at the Providence, Rhode Island-based bank. Bank of America will allow prospective borrowers to apply online, said Steve Boland, head of consumer lending.
Those efforts may never return the home equity industry to its glory days. Too many homeowners were scarred by the housing bust, and they’ve reduced their borrowing as a result. Overall household debt has fallen over the past decade, after adjusting for inflation, New York Fed data show. And some borrowers are wary about putting their house on the line, van Faassen said.
“It’s really the perfect storm,” SoFi’s Anastasio said, citing interest rates and personal loans as key drivers working against Helocs. Sentiment could change if mortgage rates go up, but for now, “each one of those has an advantage relative to Helocs.”
This article was provided by Bloomberg News.