Midwest Homeowners Tops In
Equity Credit Lines

The No. 1 reason people get a home equity line of credit is home improvement, followed by debt consolidation, according to a Census Brief released in September by the U.S. Census Bureau.

The Census Brief, published every 10 years, was based on data about home equity lines of credit that was collected in the 2001 Residential Finance Survey. It revealed that the number of U.S. homeowners with home equity lines of credit, or HELOCs, more than doubled between 1991 and 2001, from 3.4 million to 7.7 million. Twenty-nine percent of homeowners with home equity lines of credit live in the Midwest, tied with the South for the highest proportion in the nation.

Borrowers were more likely in 2001 to be using a HELOC for debt consolidation than they were in 1991, the Census Bureau reported. In 1991, 21 percent of borrowers used the line of credit for debt consolidation, while in 2001, that number grew to 26 percent.

"The one that I've seen quite a rise in is debt consolidation," said Nancy Martin, vice president of business development and manager of United Bank's Rockford branch. "People have run up their credit cards, they expected to pay them off but didn't, and they've got a lot of bills."

Other reasons to tap into home equity are to buy a vehicle, pay for education or medical expenses, to make investments or buy other real estate.

Eric Hendrickson, senior vice president for mortgage lending for Fifth Third Bank in Grand Rapids, said he sees a similar pattern for home equity lines of credit and home equity loans in West Michigan

"We see all of those. I think it's very accurate," Hendrickson said.

Hendrickson said customers interested in home equity lines of credit and loans tend to be a little older and have had time to build up that equity, also borne out by the Census Brief report.

"It seems like today, more than ever, when people buy their first homes, they're buying with nothing down," he said. "It does take a second or third home to gain some appreciation and equity before they're in a position to do a HELOC."

According to the Census Bureau report, the median age of homeowners with a HELOC was 50, compared to 46 for all other homeowners with mortgages.

For 1.6 million homeowners, the home equity line of credit was their only mortgage, and the median age for those homeowners was 60. That's compared to 48 for those whose HELOC was a second, or junior, mortgage.

"That's generally with your older people who have paid off their first mortgage and they would just like this available in case something comes up they want to buy," Martin said.

With a home equity line of credit, the bank approves a limit, and the consumer can borrow anywhere from zero dollars to the limit. The interest rate is usually variable. Once some of the principal is paid down, that amount is again available to the borrower. With a home equity loan, the lending amount, the interest rate and the monthly payments all are usually fixed from the start.

In both cases, banks look at the borrower's income and the total amount borrowed in all mortgages against the home.

Despite the Michigan economy, which has been hit by manufacturing job losses and depressed home values since the Census Bureau collected its data in 2001, home equity products are moving at a steady pace, Hendrickson said. 

"The slowdown in home equity is less than in other borrowing because much of the borrowing in home equity is to pay off those other debts," Martin added.

The Census Bureau report showed that U.S. homeowners using HELOCs tended to live in suburbs (64 percent), had a median household income of $68,300, and were overwhelmingly white (91 percent): Just 4 percent of homeowners with HELOCs were black; 5 percent were Hispanic.

Home equity line of credit borrowers also were more likely to co-own the property with a member of the opposite sex and were more likely to have owned another home previously. The median age of their homes was 27 years, and the homeowners had lived there for a median of eight years. The median value of their homes was $155,600, and they had outstanding mortgage debt of $87,100.

Some of the less common reasons borrowers gave in 2001 for acquiring a HELOC included: to start a business, 2 percent; to purchase consumer products, 1 percent; to pay taxes, 1 percent; to settle a divorce, 1 percent.

For more information about the 2001 Residential Finance Survey, visit www.census.gov/hhes/www/rfs/rfs.html.     

Why Homeowners Get A Home Equity Line of Credit

(Percent of single-family homeowners with a HELOC)

Source: U.S. Census Bureau, Census 2000 Brief, September 2007