Home renovations fueled a strong demand for open-ended home equity lines of credit (HELOCs) and closed-end home equity lines last year, according to the Mortgage Bankers Association (MBA). Its Home Equity Lending Study showed such loans increased 50 percent in 2022 compared with 2020.
“Home renovations and remodeling drove demand for home equity products in 2022, with roughly two-thirds of borrowers citing it as a reason for applying for a home equity loan. Other borrower reasons were for debt consolidation (25 percent) and emergency cash management or other (10 percent),” MBA Vice President of Industry Analysis Marina Walshsaid in a release. “The housing inventory shortage, combined with home-price appreciation and a low-rate first mortgage, make home renovations an attractive alternative for many homeowners who are looking to improve their spaces. Additionally, a HELOC or home equity loan is one way to finance big home projects while receiving a tax advantage through the deductibility of mortgage interest.
“Given the nearly $30 billion of accumulated equity in real estate, there is untapped potential for home equity lending for lenders and borrowers,” she added. “Respondents said consumer education, technological innovation, speed to delivery, and tailored products and marketing for specific customer segments are important initiatives for lenders to realize this potential.”
The study, which covered data through Dec. 31, 2022, reported the following about HELOCs:
- Average HELOC commitment volume (total credit offered) was $2.4 billion per repeater company in 2022, up 41 percent from $1.7 billion in 2020.
- Weighted average HELOC loan balances on outstandings rose from $108,231 at the beginning of the year to $112,113 at year-end.
- HELOC utilization rates improved in 2022. For example, average utilization at origination was 29 percent in 2020, 28 percent in 2021, and 30 percent in 2022.
- Average HELOC utilization based on dollar volume was 34 percent in 2022, compared with 40 percent in 2020. The percentage of HELOC accounts with no outstanding balance as of year-end 2022 was 31 percent, and the percentage of HELOC accounts funded to the contractual limit was 3 percent.
- The average HELOC borrower’s FICO score fell to 769 in 2022 from 780 in 2020. Average combined loan-to-value (CLTV) for funded HELOCs at closing dropped to 51 percent in 2022 from 54 percent in 2020.
- On an annual basis, lenders expect HELOC debt outstanding to increase 8.2 percent this year and 9.9 percent in 2024.
Some of the details reported about home equity loans include:
- Average home equity loan originations were $780 million per repeater company in 2022, up 166 percent from $293 million in 2020.
- Weighted average home equity loan balances on outstandings rose from $52,653 at the beginning of the year to $61,114 at year-end.
- The FICO score of the average home equity loan borrower fell to 752 in 2022 from 768 in 2020. Average CLTV at closing dropped to 58 percent in 2022 from 65 percent in 2020.
- Lenders expect home equity loan debt outstanding to increase 11.4 percent in 2023 but decrease 5.6 percent in 2024.