Late payments on home equity loans climbed to a 1 1/2-year high in the opening quarter of this year, while delinquencies on credit card bills fell, painting a mixed picture of how people are managing their debt.
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You’ve heard all about the bad credit mortgage crisis taking place across national housing markets. But does problem also apply to the world of home equity loans?
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It may be a slow housing market, but approximately 82 percent of Freddie Mac-owned loans refinanced during the quarter resulted in new loans that were at least five percent larger than the original amount of the previous mortgage.
This is the same percentage of cash-out refinances as was reported in the fourth quarter of 2006.
I need $50,000 to refinance credit card debt. Is it better to refinance my existing mortgage (with a balance about $140,000) into a new $190,000 mortgage, or should I borrow the extra $50,000 with a home equity loan?
After years of piling debt on their homes, Americans are becoming more cautious about using them as a piggybank.
A home equity loan can enable you to use some of that capital tied up in your house to take care of immediate needs without having to sell your property.
Those needs may include home improvements, medical bills or almost any other financial issue. An increasingly popular strategy is to use a home equity loan to consolidate debts of all kinds, paying them off at a lower rate and saving thousands. Read the rest of this entry »
Let’s consider this scenario: A year ago, a couple takes out a home equity loan - a line of credit, really.
Since then, they have used it to pay for some major improvements to the home, such as a new roof, rewiring, etc. Read the rest of this entry »
For homes in need of repairs, many banks will suggest a home equity loan. And why not?
These institutions earn a commission off such products.
But that doesn’t always mean they’re the right plan for you. This is especially the case for retired homeowers that receive limited income from Social Security, stock dividends, and/or a small pension.
A better mortgage fit: See if your local bank probably makes senior-citizen reverse mortgages.
Many elderly borrwers are “house rich, but cash poor.” A reverse mortgage can provide them with the money needed for a new roof and other expenses, without the burden of paying off rates on a home improvement loan or equity loan.
You will have the choice of a lump sum, lifetime monthly income, a credit line (except in the Texas housing market), or any combination. Most seniors choose the credit line and use the available funds as they need them, such as for a new roof, new car or a world cruise.
The big advantage of a reverse mortgage is no repayment is required as long as you reside in your home. Conversely, home equity loans require monthly payments.
Because you may have limited monthly income, adding a monthly payment for a home equity loan to your burden might not be wise.
According to Bankrate.com, two events accelerated home equity debt in the early years of the century - and both appear to be fading away.
The first thing that got the equity train rolling was when mortgage lenders started pushing piggyback home loans to help borrowers avoid paying mortgage insurance.
The second took place when interest rates on home equity lines of credit plunged and remained low for years.
Now, federal regulators are casting a cold eye on some piggyback mortgages. Moreover, in the middle of 2006, rates on home equity lines of credit reached their highest in more than five years; they’ve since remained there.
To understand the logic behind piggyback loans, you have to understand what mortgage insurance is all about. Put yourself in a lender’s shoes. You know from experience that borrowers are more likely to end up in foreclosure if their down payments are small.
Someone making a 10 percent down payment is more likely to default than someone who made a 15 percent down payment, while someone making a 5 percent down payment is riskier still.
Lenders drew the line at 20 percent. Anyone making a down payment of less than that figure would have to pay mortgage insurance. This is expensive - and it’s not tax-deductible.
But there’s a loophole.
If you borrow your 20 percent down payment as a home equity loan or line of credit, you can get a loan for 80 percent of the purchase price without having to pay mortgage insurance. That combination of a first mortgage and a “piggyback” equity loan almost always had a lower total monthly payment than a loan with mortgage insurance. And the mortgage interest on the equity debt was tax-deductible.
But in 2006, federal regulatory agencies issued guidelines to lenders that cautioned them not to go overboard with issuing piggyback loans, especially in conjunction with pay-option and interest-only adjustable-rate mortgages. Such a combination “exposes financial institutions to increased risk,” regulators said.
The guidance issued by the regulatory agencies is likely to force lenders to tighten their standards for issuing piggyback loans on top of pay-option and interest-only ARMs. That will result in a reduced number of equity loans.
Another factor has been working against equity debt for a couple of years:
The Federal Reserve started raising short-term home equity loan rates in the middle of 2004. That sent the prime rate higher, and home equity lines of credit, or HELOCs, are indexed to the prime rate. Every time prime went up, HELOC rates went up.
That wasn’t a problem early in the rate-raising cycle, when the average rate on a HELOC went from about 4 percent to 4.25 percent and then to 4.5 percent.
But in the spring of 1995, the average HELOC rate rose above the average rate on a 30-year mortgage and the HELOC rate kept rising. Rates on fixed-rate home equity loans were even higher, so there wasn’t a lot of incentive for people to refinance their HELOCs into home equity loans.
Most economists believe the Fed will keep short-term mortgage rates steady for a while, and then start cutting rates sometime in 2007.
But these predictions by economists are notoriously unreliable. Will rates on HELOCs and home equity loans go up, down or remain about the same in 2007? It’s possible that they’ll do all three at various times of the year.
This probably isn’t shocking news anymore, but: the housing market is slow in many areas of the country.
Such decreased activity doesn’t just come into play for potential borrowers; owners considering a home equity loan must also be aware of present and future conditions.
For the most part, home equity loans are categorized as “smart debt.” The interest rates are lower than they are for most other kinds of consumer credit, while typically being tax-deductible. But if you borrow the maximum amount - and a soft housing market significantly reduces the value of your home - you could end up owing more than your home is worth.
That’s a problem.
A housing market on the decline could tip the scales in favor of a fixed-rate home equity loan rather than a home equity line of credit, which generally has a variable rate. The variable rate will rise with other factors such as the prime rate, which will increase the cost of your credit over time.
Moreover, with a loan rather than a line of credit, you won’t be tempted to continually tap into that credit and risk getting in over your head.
Being conservative in taking out any loans - using the money for safe investments such as home renovations or your children’s college education - becomes even more important when the housing market is slowing.
Keep in mind: A slow housing market is NOT a good time to borrow more than 75 percent to 80 percent of your home’s equity. A high loan-to-value ratio puts you at more risk if a job transfer or other personal situation forces you to sell the house. How come?
Because in a slower housing market, you might not find a deal to pay off both the mortgage loan and the home equity loan.
However, if you are conservative and cautious in your approach, Lending Tree states, a home equity loan will continue to be “smart debt” even if the housing market is slowing.