Are Home-Equity Loans Coming Back?
Monday, January 11th, 2010During the recession, credit markets and especially those dazzling home equity lines of credit were called, limited and not for sale. The home-equity line of credit business was on hold. There are signs that this credit tool may be opening the doors again. The word is out that the consumer should beware. Terms are very different than in the real estate heydays.
Millions of homeowners watched as their home equity lines were shut down. However, as the market has stabilized, lenders are slowly getting back in the home equity game. The volume of new home equity lines is still less than 50% of the real estate boom days, but the trend is encouraging.
In the home equity golden days, the loans typically were offered one half point below prime. Those days appear gone. The new rates are prime plus one percent. The floor on new home equity rates is 4%.
To qualify, the homeowners must have a minimum 20% equity position in the residence. Overall, the home equity line of credit is a far better source of emergency funds than a credit card.
The lines of credit also come with revised standards. The days of 100% financing are gone. Most lenders now want to keep total credit exposure at 80% of value or less on residential lines. There are no assurances that the housing market has hit bottom and lenders are cautious. Credit reviews are strict and must be fully documented and substantiated.
As the credit line rates are likely to rise, homeowners should only view the line of credit as a source of emergency funding. Right now a $75,000 home equity loan would cost about $344 per month. If rates increase, that on may soon cost about $469 per month. Still, in certain situations, the line may be the way to go.
