Home Equity Borrowers: What's your profile?

A recent study by the Consumer Bankers Association compiled and analyzed data pertaining to home equity borrowers. Data points include credit score, and income and mortgage debt levels. They can help you decide if a home equity loan is right for you.

Profiling isn't just the stuff of police detectives and criminal psychologists. Even the dry world of home equity loans uses it, if only to reveal more about the mysterious identities and motivations of home equity borrowers. While lenders use this information to improve their products and services, you can use it to help decide if you, too, should become such a borrower.

Borrower demographics

A recent study from the Consumer Bankers Association (CBA) looked at borrower data obtained from home equity loans and lines of credit opened over the course of a 12-month period. During that span, the average home equity loan amount was $57,800, while the average home equity line of credit (HELOC) was somewhat larger, at $84,812. The study also noted that these borrowers had an average annual household income of $90,000 and average first mortgage debt of $169,000.

Good credit management skills

According to the study, most home equity borrowers have great credit. With an average FICO score of 730, they have demonstrated a history of paying their bills on time and keeping debt levels in check. This high level of fiscal responsibility doesn't stop when they take out equity loans and lines of credit-lenders report that their borrowers rarely miss payments. Specifically, less than 1 percent of these borrowers had late or missed payments.

The study did note, however, that the delinquency rate of HELOC customers had been rising faster than the delinquency rate of home equity loan customers. A likely culprit behind this trend is the variable rate structure of these HELOCs. With recent hikes to the prime rate, some HELOC borrowers have seen their interest rates double in the past three years.

Reasons for borrowing

Just more than half of the borrowers studied obtained their home equity debt to refinance other types of debt. In most cases, they were reducing the cost of higher rate consumer debt by converting it to home equity debt. Other common reasons for tapping home equity included planned home improvement projects and the purchase of a second home or investment property.

Where you fit in

If your income and credit score are vastly different from these averages, it doesn't automatically mean that you should shelve those remodeling plans. But it might mean that you'll need to pay more for that second mortgage.

It's also important to compare your goals with those of other equity borrowers. Most of the successful ones were focused on investing in their homes, or improving their financial situations. Raising cash for exotic vacations and other short-term gratifications was not a common motivation.

Now that you've unraveled the mystery of who uses equity debt and why, you've put yourself one step closer to deciding if equity debt is right for you.