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Home Equity Lines of Credit Making Comeback

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Mark and Debbie Chupa have lived in their Muskego, Wis., home for 20 years, and for at least the last 15, they’ve wanted to remodel the kitchen.

But costly maintenance projects — a new roof, siding — got in the way.

Until now.

The couple recently opened a home-equity line of credit at Landmark Credit Union with a 1.99 percent introductory annual percentage rate fixed for 18 months, and now are picking out kitchen cabinets, countertops and flooring to finally renovate the kitchen — and a bathroom, too. The line of credit will allow the work to be done without the Chupas dipping into their savings.

“The product was almost too good to pass up with the low interest rate for 18 months,” Mark Chupa said.

The Chupas are part of what may be the beginning of a trend. With home prices slowly increasing, consumer confidence rising and interest rates still low, HELOCs are making a modest comeback in Wisconsin.

In 2014, the amount of HELOCs on the books of Wisconsin-based banks rose 1.9 percent to more than $3 billion — the first time since the recession and housing market crash that such loans increased from the previous year.

“The biggest factor has been home prices going up rather than going down,” Doug Gordon, chief executive of WaterStone Bank, said of the revived interest in home equity lines.

With HELOCs, borrowers use their homes as collateral for a line of credit, typically paying a variable interest rate. A maximum balance is established with the lender, and the borrower then can draw on the line as needed.

As home values go up, a borrower’s equity in the house normally increases. Statewide last year, the median home sale price went up 3.1 percent to $148,000, from $143,500 in 2013, according to the Wisconsin Realtors Association. The median sale price in 2014 was up more than 12% from $132,000 in 2011, the market bottom.

Although the Wisconsin median home price still is far from its peak of $162,900 in 2007, homeowners have regained enough equity and confidence about job stability that some are ready to tackle property renovation projects or make larger purchases they’ve been putting off, lenders said.

“As an example, someone may say, ‘I have a kitchen I’ve been wanting to remodel and now I’m going to do this,'” said Jay Magulski, chief executive of Landmark Credit Union. “It might not even be something as extensive as remodeling a kitchen or adding on to a home. It may be you need to go out and take care of a roof that needs to be replaced.”

Option to Refinance
During the past few years of record-low mortgage rates, many homeowners have refinanced their mortgages — along with other debt — and don’t want to refinance again. That helps to make a separate home equity line a more appealing option for financing a large expense for some consumers, said Michael Semmann, executive vice president and chief operations officer for the Wisconsin Bankers Association.

The fact that home equity lines of credit often qualify for a tax deduction on interest also is a selling point for homeowners.

“When [home] prices are going up, they’re are a little more confident in spending. And obviously, the home equity lines are a perfect way for people to do improvements or buy cars and such because of the deductibility of the interest,” Gordon said.

The fact that home prices have stabilized or increased also gives lenders more confidence about making home equity lines of credit available, Gordon said.

Milwaukee-area financial institutions recently have been offering low introductory rates on HELOCs to nudge consumers to consider them.

Landmark Credit Union, for example, has been offering a fixed 1.99 percent annual percentage rate for the first 18 months of a home equity line of credit. After that period, the rate goes to 3.99 percent or the prime rate, whichever is higher. Today’s prime rate is 3.25 percent.

Many home equity lines of credit that start with a lower introductory rate have a “floor” rate — an annual percentage rate it can’t fall below — of around 4 percent.

Magulski said that, even though monthly payments on a HELOC may be for interest only, it’s important for borrowers to realize the loan won’t go on forever and to have a plan for paying off the balance.

“Be thinking long-term now on how it is being paid back,” Magulski said.

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