May 24th, 2018 6:30 AM by Jackie A. Graves, President
in property values has left homeowners sitting on a record $5.4 trillion in
home equity, according to Black Knight, a software, data and analytics company.
an opportunity to give out home equity loans and lines of credit, and
homeowners who need cash are eyeing them.
is poised for a strong shift toward HELOCs, as they allow borrowers to take
advantage of growing equity while holding on to historically low, first-lien
interest rates,” states Black Knight’s February 2018 mortgage report.
In 2017, homeowners
withdrew $262 billion in home equity, a new post-recession peak, according
to Black Knight But interest rates are climbing, and the Federal Reserve
is expected to raise the federal funds rate two or three more times this
the Trump administration’s new tax law eliminates the interest
deduction on home equity loans both new loans and old ones unless the money is
spent on substantial improvements that will add value to the home.
rising interest rates and the loss of tax deductibility, the net cost of home
equity borrowing will look a lot different to some homeowners now than was the
case just a few years ago, says Greg McBride, CFA, chief financial analyst for
carefully considered the changing home equity landscape and determined that a
HELOC or home equity loan is still your best course of action, here is
information that will help you.
refinances lose their appeal
Not long ago,
homeowners who had equity were using cash-out refis to pay for home
improvements, school tuition for their kids, and to consolidate higher-rate
debt, such as credit cards.
a cash-out refinance?
A cash-out refinance is
when a mortgage is refinanced for more than what is owed and the borrower takes
out the difference in cash.
are nearly 2 million fewer refinance candidates than there were entering 2018,
a 46 percent decline, according to Black Knight Financial Services’ March
incentive for borrowers to refinance in order to lower their interest rates is
all but non-existent among mortgages originated in the past five years,” the
When a cash-out
refinance holds no appeal, homeowners turn to HELOCs and home equity loans.
a home equity loan?
A home equity loan is a
second mortgage for a fixed amount, at a fixed interest rate, to be repaid over
a set period.
a home equity line of credit (HELOC)?
A HELOC is a second
mortgage with a revolving balance, like a credit card, with an interest rate
that moves up or down with the prime rate.
prices rise, so does the amount of equity homeowners have. In the fourth
quarter of 2017, U.S. homeowners had more than $5.4 trillion in “tappable
equity,” according to Black Knight. That’s the highest dollar amount on record
and 10 percent above the previous, pre-recession peak in 2005.
enough equity for a loan
been returning to equity lending and even loosening their standards a little
since mortgage rates started to rise and refinances began slipping.
value – All mortgage debt = Equity
Example: The Smiths bought a house four years ago. Today, it’s
worth $200,000 and they owe $120,000 on the mortgage. Their equity is:
$200,000 market value –
$120,000 mortgage debt = $80,000 equity
One of the
main requirements to qualify for a home equity loan is, of course, having
equity in the home. However, the days of cashing out up to 110 percent of the
value of your home are gone. But lenders generally allow homeowners to borrow
80 percent to 90 percent of the value of their homes.
requirements vary greatly by lender and type of loan. You can check your credit
score for free at myBankrate.
head of consumer lending at TD Bank, says homeowners generally need a credit
score of at least 660 to 680 for home equity loans. But other factors matter,
too, such as how much equity homeowners have and how their income compares with
their monthly debt obligations.
Generally, it helps if your debt-to-income ratio, or DTI, is in
the low 40s, Kinane says. But the lenders decision is based on a combination of
factors, in which equity plays a major role.
Debt-to-income ratio, or
DTI, is the percentage of monthly income that is spent on debts, including
mortgages, car loans, student loans, minimum credit card payments and child
Debt payments / income
Example: Jessie and Pat together earn $10,000 a month. Their debt
payments total $3,800 a month. Their debt-to-income ratio is 38 percent.
$3,800 / $10,000 = 0.38
rarely the perfect applicant with the perfect credit, Kinane says. If we have
an individual that has plenty of equity and slightly higher debt-to-income
ratio, we are more likely to make an exception to make that work because the
equity is there. So, we do use equity to offset other characteristics that
might not be as pristine.?
and short sales
If you’ve got
a foreclosure or short sale in your past, it could hurt your chances of getting
an equity loan, even if your credit score is good.
need to show a history of responsible credit use and a good payment performance
in prior mortgages. Homeowners who have been through foreclosure will have a
problem getting an equity loan, even if their credit scores have rebounded.
vary from lender to lender
rates on home equity loans and HELOCs vary among lenders. That’s because,
unlike mortgages, which are normally sold on the secondary market after the
loan is issued, home equity loans and HELOCs usually stay in lenders
the lenders don’t have to follow price guidelines or strategies determined by
investors. They can set their own terms for equity loans, as long as they meet
lending regulations. That’s why it’s so important to shop around for the best rate.
survey of May 16, 2018, shows that the average rate on a home
equity loan is 5.6 percent, and the average rate on a $30,000 HELOC is
equity loan vs. home equity line of credit
As you try to
choose between a home equity loan and a HELOC, don’t base your decision on
interest rates alone.
loans have higher interest, but the rate is fixed, whereas HELOCs have a
variable rate that typically moves up or down with the prime rate.
calculator to determine whether a home equity loan or home
equity line of credit is better for you.
important to you to have a fixed rate and you know exactly how much you need to
borrow and when you plan to use the money, a home equity loan may be the best
But let’s say
you plan to do some home remodeling and don’t know how much it will cost but
want to have the money ready. A home equity line of credit is the better
and cons of HELOCs
A HELOC works
sort of like a credit card, except it’s backed by your home and the interest
rate is much lower. You draw money when you’re ready, and you can pay that back
and reuse the credit line throughout the draw period.
to equity can be dangerous, however. For many, the temptation to spend that
money when they don’t need it is great.
line: Using home equity money for home improvements, to pay down debt or get
your kids through college can be smart. But unless you have a real need, leave
that money alone.
Source: To view the original article click here Apply to
Buy a Home Apply to