Are HELOCs Becoming More Popular?

The Long Recent Decline of HELOC Popularity

HELOCs are one way homeowners can borrow against the built-up equity in their home. Typically, a lender offers the homeowner an initial line of credit based on a percentage of the home's appraised value, minus any amount owed on the existing mortgage. During the draw period (often the first 10 years of a HELOC loan), borrowers may borrow against the line of credit up to the limit. After that there is a set period, often 20 years, to pay back the balance.

HELOC balances have been declining in recent years. There are a few reasons for this, but the long shadow of the housing market decline beginning in 2007 certainly played a role.

Despite home prices increasing in the years prior to the downturn, many homeowners still didn't possess significant equity in their homes. When home prices dropped following the crash, those homeowners suddenly had negative equity, owing more on their mortgage than their home was worth.

HELOC Balances at Commercial Banks

In the 2010s, with the recession still a recent memory, HELOCs weren't especially popular. Instead of risking lending to overextended borrowers, many lenders now offered HELOCs only to homeowners with significantly more equity than was typically required in the aughts. HELOC borrowing didn't improve during the pandemic, either: The uncertain housing market caused many banks to pull away from offering HELOCs altogether. Some still haven't returned to offering them.

But this decline didn't occur in a vacuum. During the 2010s, other types of financing grew in popularity to fill the role that HELOCs once played in many homeowners' balance sheets.

Homeowners, instead of using HELOCs, often opted for cash-out refinancing. In addition, personal loans grew in popularity during the same time period. Personal loan lenders could offer loans to pay for a kitchen remodel or other project in a matter of days, much more quickly than lenders offering HELOCs could provide.

Inflation and Interest Rates May Change the Trend

Recent rate hikes by the Federal Reserve have changed the lending landscape for homeowners, many of whom may be looking to pay down expenses incurred during the pandemic, or otherwise consolidate existing debt.

As mortgage interest rates in 2022 increase to levels far above what they've been in the past decade, the once-popular mortgage refinance market has essentially disappeared in 2022. Very few homeowners would benefit from refinancing their current loan to what would likely be a loan with a higher APR. Until mortgage rates come down again, mortgage refinancing is unlikely to return with the same magnitude as in the 2010s.

Nevertheless, many homeowners may still have more home equity that they can still borrow against, perhaps more than they realize. Total home equity among U.S. homeowners increased to more than $27 trillion in 2022, an increase of nearly $20 trillion since 2012.

Homeowner Equity in Real Estate Since 2002

There are signs that banks and fintech lenders are pulling back on refinancing to refocus on HELOC loans they offer to a new generation of homeowners who may now have more home equity than they realize. JPMorgan Chase, in a conference call earlier this year, suggested that it would start offering HELOCs to a broader market in the coming year. And they'll likely have competition by then. Fintech lenders have suggested they'll begin to offer streamlined HELOCs before the end of 2022.

Despite this pivot by some lenders, indications of a HELOC revival are still uncertain. First, homeowners, burnt once and twice shy from memories of the 2008 housing crash, need to be persuaded that a HELOC is the right product for them versus a fixed-rate personal loan or another credit product. But the average homeowner increased their equity by more than $50,000 last year, adding to what for many are their most valuable assets. That additional equity could make a HELOC loan a more attractive option for some.