Home Equity Loans
Such credit typically takes either of two forms.1 The first of these, referred to here as a "traditional home equity loan," is a closed-end loan extended for a specified period of time and generally requiring repayment of interest and principal in equal monthly installments.2 The second form is the newer "home equity line of credit," a revolving account A revolving account is a type of debt account where the outstanding balance does not have to be paid in full every month by the borrower to the lender. The borrower maybe required to make a minimum payment, based on the balance amount.
..... Click the link for more information. secured by residential equity. These accounts permit borrowing from time to time at the account holder's discretion up to the amount of the credit line, and they typically have more flexible repayment schedules than those for the traditional home equity loans.
Until recently, relatively little statistical information has been available on home equity lending. Some information about uses and users of home equity lines of credit became available in 1988 with publication of consumer surveys sponsored in 1987 by the Federal Reserve Board and industry-sponsored surveys of financial institutions (see FEDERAL RESERVE BULLETIN, June 1988, pages 361-73). In addition, the Report of Condition for year-end 1987 made available for the first time comprehensive information about amounts outstanding under home equity lines of credit at commercial banks. None of these sources revealed much about traditional home equity loans, however. To learn more about traditional home equity loans and to relate trends in these closed-end loans to
available information about home equity lines of credit, the Federal Reserve Board again participated in sponsoring consumer surveys in 1988 (appendix A). This article uses the new survey results to provide a more complete report on the market for consumer credit secured by home equity. 1. Another way homeowners may access equity in their home is to Refinance
1. When a business or person revises their payment schedule for repaying debt.
2. Replacing an older loan with a new loan offering better terms.
When a business refinances they typically extend the maturity date. an existing mortgage. When the amount borrowed in a refinancing
An extension and/or increase in amount of existing debt. exceeds the amount of the debt represented by the original mortgage plus closing costs Closing Costs
The numerous expenses (over and above the price of the property) that buyers and sellers normally incur to complete a real estate transaction. Costs incurred include loan origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, , then in effect equity-secured credit has been extended. Such "excess" funds may be used in the same manner as any other home equity type of loan. Refinancings are not discussed in this article. 2. Traditional home equity loans are sometimes called second mortgages, although legally they may involve a first lien , claim or charge held by one party, on property owned by a second party, as security for payment of some debt, obligation, or duty owed by that second party. .
HOLDINGS OF HOME EQUITY LOANS
The Federal Reserve Board has for many years sponsored surveys of consumers to gather information about their overall financial situation and about their use of specific financial services The examples and perspective in this article or section may not represent a worldwide view of the subject.
Please [ improve this article] or discuss the issue on the talk page. . These surveys can be used to assess the use of home equity loans over time. Before the mid-
Middle: midbrain. 1980s, nearly all home equity loans were of the traditional type. More recent surveys provide information on consumer use of both types of home equity credit.
Consumer surveys indicate that 5.4 percent of homeowners had a home equity loan in 1977.(3) By 1983, this proportion had risen only slightly, to 6.8 percent.4 However, surveys taken last year reveal substantial growth in the use of home equity loans since 1983.(5) These most recent surveys found that 11 percent of homeowners, or roughly 6.5 million families, had a home equity loan in the second half of 1988. Closer examination of the 1988 surveys shows that 5.6 percent of homeowners had a home equity line of credit, while a nearly equal proportion, 5.3 percent, had a traditional home equity loan.
Widespread consumer interest in home equity credit line plans dates to 1986, when extensive promotion of such plans by financial institutions began. In that year, the Tax Reform Act mandated the gradual removal of federal income Tax deduction
An expense that a taxpayer is allowed to deduct from taxable income.
..... Click the link for more information. for interest paid on nonmortgage consumer credit, enhancing the attractiveness to consumers of using mortgage instruments to fund expenditures that typically have been financed by consumer loans. fa·vor·a·ble
1. Advantageous; helpful: favorable winds.
2. Encouraging; propitious: a favorable diagnosis.
3. interest rates compared with those on many types of consumer credit, particularly credit cards, also have encouraged borrowing against home equity. These features of reduced interest expense and tax deductibility characterize both types of home equity loans. In addition, the convenience of being able to draw as needed prn. See prn order. against a line of credit has proved to be a particularly attractive feature of the credit line account.
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. the 1988 Surveys of Consumer Attitudes, 31 percent of the families with a home equity line of credit obtained it in 1988, and 83 percent of families with accounts had opened them since 1986. In comparison, about one-fifth of the traditional home equity loans were established in 1988, and 64 percent had been granted since 1986. Looking at 1988 originations alone, 63 percent were credit lines and 37 percent were closed-end loans. Thus, in recent years home-equity-secured credit lines have been the more popular vehicle, but consumer demand for the traditional loan has by no means evaporated
reduced in volume by evaporation; concentrated to a denser form. .
Moreover, whether the growth of credit line accounts will continue to out·pace
tr.v. out·paced, out·pac·ing, out·pac·es
To surpass or outdo (another), as in speed, growth, or performance.
[-pacing, that of traditional home equity loans is open to question. Two basic factors seem likely to influence near-term developments. First, many creditors have aggressively promoted their credit lines plans with discounted finance rates and waivers or rebates of closing costs and fees. If creditors reduce these promotions, home equity lines of credit will become relatively less attractive. Second, the recent Flattening of the yield curve
A change in the yield curve when the spread between the yield on long-term and short-term Treasuries has decreased. Compare steepening of the yield curve and butterfly shift. , so that Short-term interest rates
Interest rates on loan contracts-or debt instruments such as Treasury bills, bank certificates of deposit or commerical paper-having maturities of less than one year. Often called money market rates. and longer-term rates are more nearly equal, means credit lines may no longer have a near-term price advantage over the closed-end loans. Typically, rates on traditional home equity loans are more in line with longer-term rates, while credit lines are indexed to shorter-term rates. Until recently, short-term interest rates were well below rates on longer-term instruments, as shown in the chart. As a result, credit line accounts have been priced fa·vor·a·ble
1. Advantageous; helpful: favorable winds.
2. Encouraging; propitious: a favorable diagnosis.
3. relative to fixed-rate, closed-end home equity loans for most of the past three years. If the flatter yield curve persists, the difference between the Growth Rates
The compounded annualized rate of growth of a company's revenues, earnings, dividends, or other figures.
Remember, historically high growth rates don't always mean a high rate of growth looking into the future. for the two home equity products should shrink Vox populi noun A psychiatrist . 3. Thomas A. Durkin and Gregory E. Elliehausen, 1977 Consumer Credit Survey Board of Governors of the Federal Reserve System
The managing body of the Federal Reserve System, which sets policies on bank practices and the money supply. , 1978). 4. "1983 The Survey of Consumer Finances (SCF) is a triennial survey of the balance sheet, pension, income, and other demographic characteristics of U.S. families. The survey also gathers information on the use of financial institutions. The study is sponsored by the U.S. ," (Board of Governors of the Federal Reserve System, Division of Research and Statistics). 5. "Survey of Consumer Attitudes," July-December 1988 (body, education) University of Michigan - A large cosmopolitan university in the Midwest USA. Over 50000 students are enrolled at the University of Michigan's three campuses. The students come from 50 states and over 100 foreign countries. , Institute for Social Research, Survey Research Center).
SOURCES OF HOME EQUITY LOANS
Before the mid-1970s, home equity loans were in large part the province of consumer finance companies, second mortgage companies, and individuals. Today the home equity loan market is dominated by Depository institution
A financial institution that obtains its funds mainly through deposits from the public. This includes commercial banks, savings and loan associations, savings banks and credit unions. , especially commercial banks and to a lesser extent savings institutions savings and loan association, type of financial institution that was originally created to accept savings from private investors and to provide home mortgage services for the public.
The first U.S. savings and loan association was founded in 1831. and savings bank, financial institution that, until recently, performed only the following functions: receiving savings deposits of individuals, investing them, and providing a modest return to its depositors in the form of interest. ) (table 1). However, some relative specialization A career option pursued by some attorneys that entails the acquisition of detailed knowledge of, and proficiency in, a particular area of law.
As the law in the United States becomes increasingly complex and covers a greater number of subjects, more and more attorneys are by type of home equity loan product is ob·serv·a·ble
1. Possible to observe: observable phenomena; an observable change in demeanor. See Synonyms at noticeable.
2. among creditors. In particular, finance companies have provided nearly a third of the traditional home equity loans while playing an insignificant role in the market for home equity lines of credit. Among depository institutions, commercial banks and savings institutions have roughly equal shares of the market for traditional home equity loans, but banks are the pre·dom·i·nant
1. Having greatest ascendancy, importance, influence, authority, or force. See Synonyms at dominant.
2. source of credit lines, accounting for 54 percent of the total market.
The specialization of finance companies in the traditional home equity loan market may in part reflect long-time customer relationships as well as limits on the services available from finance companies. Because finance companies typically do not offer deposit services (except, in some cases, through banking affiliates), they are less well suited to offering credit accounts that can be accessed by check, a feature of virtually all home equity lines of credit. Also, finance companies tend to serve a somewhat lower-income home-owner clientele with smaller amounts of home equity.6 Lenders often prefer to exercise tighter control over the credit use of such customers by granting them loans of specified amounts with pre·de·ter·mine
v. pre·de·ter·mined, pre·de·ter·min·ing, pre·de·ter·mines
1. To determine, decide, or establish in advance: payment schedules. 6. For example, the median incomes of traditional home equity loan borrowers at commercial banks and savings institutions were $55,000 and $40,000 respectively in 1988. In contrast, the median family income of persons borrowing from finance companies was $32,000. See memorandum, "Home Equity Loan Holding and Use: Results of 1988 Consumer Surveys," to the Consumer Advisory Council, January 24, 1989, table 4.
USERS AND USES
OF HOME EQUITY CREDIT
In general, home equity credit users fit the profile of a financially sophisticated, "upscale" group of consumers. However, important differences exist between holders of credit lines and users of traditional home equity loans. Moreover, differences among customers of each product in demographic characteristics, in uses of the funds, and in the perceived attractiveness of the two credit products all suggest that they may not be close substitutes in the minds of many consumers.
Demographic Characteristics of Holders
of Home Equity Loans
Families that have a home equity credit line typically have higher incomes and have built up substantially more equity in their homes than homeowners in general have, or those with a first mortgage only (table 2). Families with traditional home equity loans likewise have higher incomes and more equity than the average first mortgagee n. the person or business making a loan that is secured by the real property of the person (mortgagor) who owes him/her/it money. (See: mortgage, mortgagor)
MORTGAGEE, estates, contracts. He to whom a mortgage is made. , but they have significantly smaller amounts of each than holders of credit line accounts have. In 1987, families with credit line accounts had median incomes of $51,000, and holders of traditional home equity loans had median incomes of $43,000. In comparison, the median income for those with a first mortgage only was $38,000. Median amounts of home equity were $83,000 for credit line holders, $43,000 for those with traditional home equity loans, and $35,000 for those who had a first mortgage only. Those borrowing against home equity also tend to be older than homeowners with a first mortgage only; in part their higher incomes and home equity may reflect the fact that older homeowners have probably progressed further in their careers and have owned their homes longer. Homeowners with no mortgage debt at all tend to have siz·a·ble also size·a·ble
Of considerable size; fairly large.
siza·ble·ness n. equity and relatively low incomes; the median age for this group is 65, and many of them are on retirement incomes and have owned their homes for a long time.
The strong correlation between the use of home equity for loan collateral and levels of family income and equity is further illustrated in table 3, which groups homeowners by income and equity categories and shows the proportion of each group that has one or the other type of home equity product. The data reveal that home equity lines of credit in particular are an upscale product, with larger proportions of each of the higher-income groups ($35,000 or more in annual income) holding a credit line account rather than a traditional home equity loan. The other demographic characteristics in tables 2 and 3 do not show significant differences between holders of credit lines and users of traditional home equity loans, although the latter are somewhat more likely to be nonwhite non·white
A person who is not white.
nonwhite adj. or Hispanic and to have had somewhat fewer years of formal schooling than credit line holders.
The geographic breakdown in table 3 illustrates the pronounced regional character of the market for home equity lines of credit. Twelve percent of homeowners in the Northeast have a credit line account, compared with an average of 4 percent for the other three major regions. A similar, though less pronounced, geographic pattern geographic pattern A general descriptor for lesions in which large areas of one color, histologic pattern, or radiologic density with variably scalloped borders sharply interface with another color, pattern or density, fancifully likened to national boundaries
..... Click the link for more information. also characterizes the market for traditional home equity loans. The Northeast is, of course, a part of the country where incomes and real estate values have both grown rapidly, and it is also the home of many financial institutions that have aggressively promoted home equity loan products.