History repeats itself. Past is prologue. Everything is a cycle. Pick any cliché you want, but the fact is lending vehicles that practically disappeared following the 2008 credit crisis are back.
Home-equity lines of credit, often called HELOCs for short, jumped 8% in the first quarter, according to a report in the The Wall Street Journal. The report said $13 billion in HELOCs were extended in the first three months of the year, the most to kick off a calendar year since 2009.
A HELOC functions like this: A lender agrees to lend a borrower a maximum amount of money over a certain period of time, using the borrower’s home as collateral. Unlike in a home equity loan, there is no lump sum payment, but a line of credit that can be borrowed up to a limit, and is paid back in minimum monthly payments. It’s basically a credit card with a house as collateral, and the total principal plus interest is due back at the end of the loan through either a balloon payment, or on a schedule.
The peak for HELOCs was $113 billion in the third quarter of 2006. Last year, a total of $59 million was lent in the form of HELOCs and home equity loans.
HELOCs caused major issues that during the credit crisis. Some banks were offering HELOCs up to the full value of the owners home. When the housing bubble burst and values went down, suddenly the value of the home was less than borrowers had taken as credit.
The Journal notes that now HELOCs are being offered to consumers with good credit and homes that have increased in value, and generally only for 80-85% of the total value of a house.