With the house prices are accelerating as they are, today’s owners sit on a collective capital of $ 22.7 trillion, the highest amount since analysts began collecting such data in 1945. It is according to a LendingTree study that examines one of the reasons borrowers are reluctant to apply for home equity loans – they fear their credit will take a hit.
“Many owners don’t rush to tap their equity,” wrote Tendayi Kapfidze, chief economist and vice president of LendingTree. “In fact, some types of home equity loans in 2020 hit their lowest level in over 16 years.”
He says there are several reasons for this (including tighter lending guidelines and a fear of debt distress).
However, he adds, “borrowers don’t have to worry that the exploitation of their home equity could hurt their credit rating, at least not in the long run,” a statement he bases based on data collected from 1,500 borrowers in 40 metropolitan areas who applied for a second mortgage.
“Although most borrowers see a drop in their credit rating after taking out a home equity loan, the drop tends to be relatively small and their credit rating typically recovers in less than a year,” a- he declared.
Here are some of the main findings of the study:
- Borrowers in the 40 subways analyzed in the LendingTree study saw an average drop of 17.5 points in their credit score in the months following a home equity loan.
- Across the 40 subways featured in LendingTree’s study, borrowers had an average credit score of 727 before taking out a home equity loan. In general, average credit scores were high enough that a drop of 10 to 20 points probably did not have a major impact on the cost or accessibility of credit.
- Credit scores took an average of 104 days, or about three and a half months after a home equity loan was closed, to reach their lowest point. Kansas City homeowners saw their credit scores hit their lowest point the fastest with an average lead time of 63.5 days. The longest period of decline was for owners in Portland, Oregon, 154.5 days.
On average, according to the study, scores tended to return completely to their pre-loan average in less than a year. The full cycle to return the credit score to its old position before the home equity loan takes on average around 201 days.
Because a home equity loan is likely to have a negative impact on a borrower’s credit in the short term, Kapfidze offers some recommendations for homeowners keen to bounce back faster from that drop.
It is better for borrowers to refrain from applying for additional credit while recovering from the home equity loan, he said.
“If you keep asking for new forms of credit right after you take out a home equity loan, your credit rating may not only drop further, but also take longer to rebound,” she said. “As a result, the fewer new credit applications you submit, the better your score will be.”
He also suggests using as little credit as you need during this time, paying every bill on time, and looking into debt relief programs if that’s a problem.
The full study is available at LendingTree.com.