Interest Rates On Home Equity Loans Today – Home-equity lending is now gradually rebounding, and 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 that space,” said John T. Walsh said. Not only are more consumers showing interest in equity loans, but more lenders are coming to the market with equity products, he said.
Interest Rates On Home Equity Loans Today
Bank of America reported a 75 percent increase in originations of home-equity loans and lines of credit in the first quarter of this year compared to last year. The lender offers a fixed-rate equity loan product and a variable-rate home equity line of credit, or HELOC.
Home Equity Loan Vs. Home Equity Line Of Credit
Matt Pottere, the bank’s home-equity product executive, predicts that equity lending will continue to grow this year due to higher home values, higher consumer confidence and a backlog of home improvements put on hold during the recession.
More of the bank’s customers are interested in Helox than equity loans because they can draw on the line of credit as needed over time, he said.
Mr. Pottere also noted that the bank is reaching out to customers facing big jumps in monthly payments on an existing Heloc to help transition them to something more manageable, like a new Heloc.
Hellocs were easier to come by when home values soared a decade ago, but many borrowers who took advantage of the loans weren’t prepared for the increase in payments when the 10-year interest-only period ended. People who can’t afford the payments and don’t qualify for other credit may qualify for a loan modification, Mr. Potere says.
Best Loans For Home Improvement
Another potential market for equity loans are homeowners who refinanced their mortgages when interest rates were below 4 percent and may now be more inclined to improve their existing home rather than borrow and sell and move up. But the reality is that people tend to move “when their needs change dramatically,” notes Keith Gumbinger, vice president of financial publisher HSH.com, and they generally don’t have many choices.
Interest rates on equity loans are also higher than current rates on new first mortgages. Rates on equity loans average less than 6 percent, Mr. Gumbinger said. Helocs, which typically have a variable rate based on the prime rate, average 5 percent.
Lenders are stricter about how much they will allow homeowners to borrow. “Generally, lenders won’t let you take out more than 80 percent of the home’s value,” he said. So even with high home values, many homeowners still may not have enough equity to qualify.
That’s 85 percent of the maximum allowed by Bank of America, Mr. Potter said. But the bank’s typical equity borrower has a FICO score in the high 700s.
What Is Home Equity, And How Much Can You Cash Out?
While some lenders will look to equity lending to help fill the gap in applications left by the decline in refinancing, Mr. Gumbinger said he doubts they will be too aggressive. The loans aren’t very profitable, and many lenders are still struggling with portfolios of nonperforming second-lien loans, he explained.
A significant portion of the nation’s homeowners are still stuck in a negative equity position, or “underwater.” According to RealtyTrac, as of the first quarter, 17 percent of residential properties were secured by loans, which were 25 percent higher than the value of the home. 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, and other expenses, your home equity can provide a solution. However, there are multiple ways to tap into your equity. We break down the pros and cons of a home equity loan.
What Can Your Heloc (home Equity Line Of Credit) Do For You?
Home values in Arizona remain high and interest rates have been near historic lows in recent years, causing many homeowners to consider borrowing against their home equity. What is equity? The difference between the value of your home and the amount you still owe on your mortgage.
For example, if your home is currently valued at $350,000 based on a home appraisal and you have a $175,000 balance remaining on your mortgage, you will have approximately $175,000 in equity. You may be able to borrow from 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 equity, they may lend up to 80% on average.
Typically, the lender will arrange for a home appraisal to value your home using any of these options.
A home equity loan uses the equity in your home as collateral. Typically, the lender will arrange for a home appraisal to value your home. With a home equity loan, you borrow a fixed amount at a fixed interest rate and repay it in equal monthly installments – just like you would with an auto loan.
How To Tap Home Equity As Interest Rates Rise
A HELOC, or home equity line of credit, also borrows against the equity in your home. HELOCs typically have variable rates, which means your interest rate is subject to market fluctuations.
Example: Imagine you are approved for a $35,000 HELOC. You withdraw $5,000 from the HELOC to pay some urgent bills. Five months later, you withdraw $10,000 for a bathroom remodel. At this point, you’ve used up a total of $15,000 of your HELOC funds, and $20,000 is still available.
Your monthly payment on a HELOC is based on your total outstanding balance, whether the amount used is taken out in one lump sum or in multiple advances.
Some lenders, like Desert Financial, 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 giving you the peace of mind of a set interest rate.
How A Home Equity Loan Works, Rates, Requirements & Calculator
This type of loan works well in situations where you may need the money in small increments over time — for example, if you plan to complete several remodeling projects over the coming years or if you have multiple goals you want to reach (eg, consolidating high-interest debt and paying for home repairs).
A third option to tap into your home equity is to refinance your mortgage with a cash out option. In this case, you are replacing your current home loan with a new home loan for an amount greater than what you currently owe in order to access funds from your existing equity.
Let’s go back to our $350,000 home value example, where your current mortgage balance is $175,000. You work with your lender to cash out $50,000 with a mortgage refinance. So, your new mortgage amount will be $225,000 – your existing $175,000 balance plus the additional $50,000 you borrow from your home equity.
Your new mortgage may have a fixed or variable interest rate depending on the type of loan. The benefit of a fixed rate is that your payment amount will be the same every month, making it easier to plan. However, if interest rates go down, you won’t automatically get a lower rate. With a variable rate, you can take advantage of low points in the market; However, your rate will rise as the market increases.
What Is Home Equity?
Now that you understand the basics of each loan type, let’s see how a home equity loan, HELOC, and cash-out refinance stack up in terms of costs and benefits. Keep in mind that not every lender offers all three loan types, and each lender has different terms and options for tapping into your home equity. Check with your credit union or mortgage lender for specifics on home equity options.
Ultimately, each loan option has pros and cons when it comes to accessing the available equity in your home. A regular fixed-rate home equity loan may be perfect for a one-time need, while a cash-out refinance works best if you want to stick to a single loan payment when rates are low. 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 introductory rate and the ability to borrow the money you need are important to you. Contact us to talk about your options for home equity and mortgage refinancing!
The material presented here is for educational purposes only
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