Rising interest rates are finally slowing the growth of home-equity borrowing.
In response, lenders are rolling out a host of inducements to attract new borrowers and to keep existing homeowners from paying off their loans.
U.S. Bank, a unit of U.S. Bancorp, this week introduced a home-equity loan with a rate of 5.99 percent that’s fixed for 20 years. Previously, the bank’s rate in most markets was 6.99 percent or higher.
Other banks are offering enticements to keep customers who are worried about rising rates from paying off their home-equity lines of credit.
Wachovia Corp.’s “win back” program is offering a rate of prime minus 1 percent to certain borrowers who previously paid off their home-equity lines or seem likely to. And Wells Fargo & Co. in August began a program that gives existing customers the option of continuing to make interest- only payments on their home-equity lines of credit, while setting a fixed rate on some or all of the balance.
Home-equity lending has boomed in recent years as record numbers of Americans have taken advantage of low rates and rising home values to fund their spending needs or pay off high-cost debt.
Borrowing against home values added $600 billion to consumers’ spending power last year, according to Federal Reserve calculations, with about one-third of that sum coming from home-equity loans and lines of credit.
Home-equity lending also has been a bright spot for lenders at a time when mortgage refinancings have declined. Profit margins on home-equity lines of credit are twice as high as those on other consumer-banking products such as credit cards, estimates Morgan Stanley analyst Ken Posner, largely because a robust housing market has helped keep credit losses low.
But rising short-term interest rates have put a damper on the home-equity market’s rapid ascent. The value of home-equity lines of credit at commercial banks increased 17 percent in September over the previous year, according to the Federal Reserve. That was well below the 45 percent annual growth rate seen last fall.
As rising rates begin to pinch borrowers’ pocketbooks, the number of homeowners paying off their credit lines has increased.
“We’re seeing significantly higher payoffs versus this time last year,” says Alan Dakay, president and chief executive of Citigroup Inc.’s home-equity division.
At Wells Fargo, the number of borrowers prepaying their credit lines has climbed 50 percent this year.
Pricing can vary significantly based on geography.
“Northern Ohio, Chicago and Denver are very much becoming hotbeds of competition,” says Trent Spurgeon, vice president of product management for U.S. Bank.
