Home Equity Loans Interest Rates – Home equity loans are gradually making a comeback now that property values in some areas have risen to levels that give homeowners something to borrow from.
“We’re definitely starting to see a pickup in this space,” said John T. Walsh, the president of Total Mortgage Services, a direct lender and broker licensed in about 20 states. Not only are more customers showing interest in equity loans, but more lenders are coming to market with equity products, he said.
Home Equity Loans Interest Rates
Bank of America reported a 75 percent increase in home loan originations and lines of credit in the first quarter of this year compared to last year. The lender offers a fixed rate loan product and a variable rate home equity line of credit, or Heloc.
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Matt Potere, the bank’s home equity product executive, predicts equity lending will continue to grow this year due to higher home values, consumer confidence and a backlog of home improvements which were delayed during the recession.
More of the bank’s customers are interested in Helocs than equity loans because they can draw on the line of credit when they need it over time, he said.
Mr. Potere also noted that the bank is reaching out to customers facing a big jump in monthly payments on an existing Heloc to help them get something more manageable, such as a new Heloc.
Helocs were easy to get a decade ago when home values soared, but many borrowers who took advantage of the loans aren’t prepared for the increased payments once the 10-year term ends. interest only Those who can’t make the payments and don’t qualify for another line of credit can qualify for a loan modification, according to Mr. power
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Another potential market for equity loans are homeowners who refinanced their mortgages when interest rates were well below 4 percent and may now be more likely to borrow against their equity and home improvements existing rather than sell and raise. But the reality is that people tend to move “when their needs have changed appreciably,” noted Keith Gumbinger, vice president of HSH.com, a financial publisher, and generally don’t have much of a choice.
Interest rates on home equity loans are also higher than current rates on a new home equity loan. Mr. Gumbinger said home equity loan rates average just under 6 percent. Helocs, which usually have a variable rate based on the principal rate, average about 5 percent.
Mr. Gumbinger noted, too, that lenders are stricter about how much they will allow homeowners to borrow. “Generally, lenders won’t let you take down more than 80 percent of the home’s value,” he said. So even with higher home values, many homeowners still may not have enough equity to qualify.
The maximum allowed by Bank of America is 85 percent of the value, Potere said. But the typical bank borrower has a FICO score in the 700s.
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While some lenders will look to equity loans to help fill the application gap left by the refinancing slump, Mr. Gumbinger said he doubts they are very aggressive. The loans are not as profitable, and many lenders are still struggling with portfolios of nonperforming second-lien loans, he explained.
A significant portion of the country’s homeowners are still stuck in a negative, or “underwater,” equity position. As of the first quarter, 17 percent of residential properties were secured by loans totaling at least 25 percent more than the home is worth, according to RealtyTrac. Another 16 percent are between 10 percent negative equity and 10 percent positive equity.
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If you’re looking for ways to get cash for bills, home renovations, or other expenses, your home equity could provide a solution. However, there is more than one way to leverage your equity. We’re breaking down the pros and cons of a home equity loan versus a HELOC and cash-out refinance.
What Can Your Heloc (home Equity Line Of Credit) Do For You?
Home values in Arizona have remained high and interest rates have remained near record lows in recent years, prompting many homeowners to consider borrowing against their home equity. What is equity? The difference between the home’s value and the amount you still owe on your mortgage.
For example, if your home is currently valued at $350,000 according to a home appraisal and you have a balance of $175,000 remaining on your mortgage, you would have approximately $175,000 in equity. You may be able to borrow against your equity if you need funds for repairs, remodeling, bills or other expenses. While lenders typically won’t lend you the full value of your home’s equity, they can lend up to 80% on average.
Typically, the lender will arrange a home appraisal to value your home with either of these options.
A home equity loan uses the equity in your home as collateral. Typically, the lender will arrange a home appraisal to value your home. With a home equity loan, you would borrow a fixed amount at a fixed interest rate and pay it back in equal monthly installments, just like you would with a car loan.
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A HELOC, or home equity line of credit, also borrows against the equity you have in your home. HELOCs typically have variable rates, meaning your interest rate will fluctuate up and down with the market.
Example: Let’s say you’re approved for a $35,000 HELOC. Withdraw $5,000 from your HELOC to pay some pressing bills. Five months later, you withdraw $10,000 to pay for a bathroom remodel. At this point, you’ve used a total of $15,000 of your HELOC funds, leaving $20,000 still available.
Your monthly payment on a HELOC is based on your total outstanding balance, whether the amount used is taken as a lump sum or in multiple advances.
Some lenders, such as Desert Financial, also offer a hybrid HELOC with the option of a fixed rate on certain withdrawals. This type of loan allows you the flexibility of a traditional HELOC while offering the peace of mind of a fixed interest rate.
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This type of loan works well for situations where you may need the money in smaller increments over time, for example if you plan to complete several remodeling projects over the next few years or if you have several goals you want to achieve (such as consolidating high-interest debt payments and paying for home repairs).
The third option to tap into your home equity is to refinance your mortgage with a payment option. In this scenario, you are replacing your current home loan with a new home loan for an amount higher than what you currently owe to access your available equity funds.
Back to our $350,000 home value example, where your current mortgage balance is $175,000. Work with your lender to get $50,000 cash out with a mortgage refinance. So your new mortgage amount would be $225,000: your current balance of $175,000 plus the additional $50,000 in cash you’re borrowing from your home equity.
Your new mortgage may have a fixed or variable interest rate depending on the type of loan. The advantage of a fixed rate is that your payment amount will be the same each month, so it’s easy to plan. However, if interest rates go down, you won’t automatically get the lowest rate. With a variable rate, you can take advantage of low points in the market; however, you should also raise your rate with market increases.
Home Equity Loan Or Line Of Credit: Which Is Right For You?
Now that you understand the basics of each type of loan, let’s take a look at how a home equity loan, HELOC, and bill pay stack up when it comes to costs and benefits. Keep in mind that not all lenders offer all three types of loans, and each lender will have different terms and options available to tap your home equity. Check with your credit union or mortgage lender for specific information on home equity options.
Ultimately, when it comes to accessing the available equity in your home, there are pros and cons to each loan option. A standard fixed-rate loan may be ideal for a one-time need while rates are low, while a cash-out refinance works best if you want to stick with one loan payment. A home equity line of credit with a fixed rate option from Desert Financial offers flexibility and peace of mind, especially if benefits like a low down payment and the ability to borrow money as you need it are important to you. . Contact us to discuss your home equity and mortgage refinancing options!
The material presented here is for educational purposes only
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