February 19th, 2017 8:38 AM by Jackie A. Graves, President
In recent years, home equity loans have gone the way of boy
bands. So last-century. In an era of low interest rates, home equity lines of
credit and cash-out refinances have been the equity-tapping products of choice.
Home equity lines of credit, or HELOCs, have
been popular because they usually are built with low introductory rates, which
have been scraping the bottom. Cash-out refis have been sought because with mortgage rates at a historical floor, millions of
homeowners have been refinancing to lower their rates and tap the equity in
Plain-and-simple home equity loans, with the security of a
locked-in interest rate that never changes, have been yesterday’s news. But as
the economy improves and interest rates rebound, you may have to go throwback
if you want to access some of your home value.
At least some of the blame for the missing home equity loans can
be placed on regulation. Dodd-Frank, the wide-ranging financial reform act
instituted in 2010, mandated that lenders revise statements and disclosures for
home equity loans, but not for HELOCs.
It required lenders to implement extensive system changes, and
as a result, some companies decided to eliminate home equity loan
products. Besides, low interest rates and rising home values kept lenders busy
with refinance demand and HELOCs. Banks and borrowers had no interest in the
additional paperwork required on home equity loans.
Mortgage rates were under 4% for all but two months for 2015 and
2016, according to Freddie Mac. But the sun appears to be setting on the sub-4%
Logan Pichel, head of consumer lending for Regions Bank,
believes that as rates rise, more people may back down from a move-up
mentality. He says homeowners in 2017 and beyond may consider remodeling their
existing house — with its already low mortgage rate — instead of buying a
bigger home at a higher interest rate.
In that scenario, a home equity loan may be the right solution.
Pichel predicts many homeowners will say, “I am not going to
move up into the next bigger house because I’m sitting here today on a 3 1/2%
mortgage rate, and if I were to sell my home and go buy another one, I now have
a 4 1/2% mortgage rate.” A home equity loan would allow those homeowners to
upgrade a kitchen, add a bedroom or build an outdoor living area, for example.
And with rates expected to climb in the months ahead, the relative
advantage of a HELOC with a low introductory rate is not as clear because it’s
likely to increase when periodic rate resets kick in.
“Our opinion is, we’re going to see fewer move-up buyers and
we’re going to see more home equity business as a result of the increase in
interest rates,” Pichel says.
Johnna Camarillo, manager of equity lending at Navy Federal
Credit Union, agrees.
“I think we’re going to see a shift back to fixed equity loans,”
Camarillo says. “Our members tend to be more fiscally conservative, and so they
like the security of knowing that ‘my payment is always going to be X number of
dollars.’ Especially if they already know that they’ve got a specific purpose
for their loan.”
After that decision, Pichel says, the next move is to choose
between a home equity loan and a home equity line of credit. HELOCs
usually begin with a slightly lower rate than fixed-rate home equity loans.
But HELOC rates are commonly adjustable and subject to the ups
and downs of short-term interest rates, at least at the beginning. Many lenders
allow borrowers to carve out a portion of their balance owed and put it into a
“As you see an increase in interest rates, you’ll have a set of
individuals that will say, ‘You know what, I’m going to lock in at a fixed
rate,’ ” he says.
And some customers, Pichel says, appreciate the discipline of a
fixed-rate loan for reasons including:
Some customers like knowing the exact numbers. Navy Federal’s
Camarillo says there’s a comfort level with knowing the specific amount
you’ll owe, how long it will take to pay the loan off and what your payment
will be each month.
By Hal M. Budrick - To view the original article click here