|Lenders have relaxed
for home equity line borrowers
Lenders continue to promote home equity lines
of credit as a valuable tool to pay off credit card and other debt,
and borrowers appear to be eating it up, according to a recent study.
The report, released by the Consumer
Bankers Association, showed an overwhelming 40 percent of people
with home equity lines cited debt consolidation as their reason
for obtaining the loan.
Lending standards relaxed too, as borrowers
in 1997 were able to get larger home equity lines through a shorter
application process. Furthermore, people were able to borrow more
despite higher debt-to-income ratios, and they were able to do so
with more of their home's equity than in previous years.
- The average home equity line rose 2.6 percent
in 1997 to just under $41,000 even as the time to apply for them
dropped to12.6 days from 14 days.
- During approval, almost all of the lenders
surveyed used a formula that compares an applicant's outstanding
debt and net income. The average ratio rose 17 percent to 55.9
percent in 1997 from 47.8 percent in the previous year.
- Lenders compute something called a loan-to-value
ratio when deciding how much home equity credit to extend. For
instance, they will look at a $100,000 home with $50,000 still
owed on the mortgage and then extend a certain percentage of the
$50,000 difference in credit. At 80 percent loan-to-value, a historical
banking maximum, that amount would be $30,000.
Yet in 1997, the average maximum climbed to just over 91 percent
from 86.8 percent the previous year. Some 43 percent of lenders
had a maximum loan-to-value ratio of 100 percent, while another
5 percent even offered home equity lines with a loan-to-value
ratio of more than 125 percent.
- Total fees charged to home equity line customers
fell almost 38 percent to $216 in 1997. The figure excludes fees
eaten by the lender.