Are Home Equity Loans Making a Comeback?


Home equity loans – when homeowners are able to borrow a portion of their equity to put toward a major purchase such as a renovation or an education expense,- were all the rage in the mid-90s. However, when the housing market became depressed, lenders became uneasy about having homeowners tap into their equity, and they began to vanish.

A slew of experts all agree that with home values increasing, lenders are more confident that their loans will be repaid, and more homeowners will look toward home equity loans when needing to finance that large purchase. The housing market continued to go downhill over the years. However, home values have recently been on the rise. On average, existing home prices are up nearly 12 percent from a year ago, which is the biggest annual increase since the market turned down in 2005. And now, as lenders become more open to home equity lending, more homeowners are cashing in on home equity.

A slew of experts all agree that with home values increasing, lenders are more confident that their loans will be repaid, and more homeowners will look toward home equity loans when needing to finance that large purchase.

“Home prices are starting to stabilize and even increase,” says Caleb Cook, vice president for lending at Seattle Metropolitan Credit Union. “It’s restoring some of the equity people lost.”

“2013 has seen a real turnaround in home equity lending,” said Greg McBride, senior analyst for Bankrate.com. “The recovering housing market has led to a renewed appetite.”

“As home values continue to rise, we’ll see more people taking out home equity loans and home equity lines of credit,” says Vera Gibbons, personal finance expert.

There are some things to be aware of when delving into the world of home equity loans. Lenders recommend at least 20 percent of equity remain in your home.

“The lender is not lending every last nickel of property value,” McBride said. Having less than 20 percent of equity doesn’t help the homeowner either; once you reach below 20 percent, you’ll be required to pay private mortgage insurance, or PMI. So, for instance, if your house is worth $100,000, and you have a $70,000 mortgage, you’ll only be able to take out a home equity of $10,000 at most, and many companies have a minimum amount.

In addition, since you’re using your home as collateral, you must be able to make your repayments. If you’re unable to, there goes your home. Be sure to ask questions and read all of the fine print thoroughly before proceeding.

There are two types of home-equity lending: lines of credit and loans. A loan is a one-time lump sum to repay over a certain period of time — same interest rate and monthly payment. Since it’s fixed, it won’t increase over time. Homeowners are able to borrow up to $100,000 and still deduct the interest when filing for tax returns.

A home equity loan of credit works more like a credit card in that you’re able to borrow up to a certain amount for the life of the loan, and can take out money when needed. These are typically the best option when the cost is a one-time-only situation, and needs to be paid off in a certain period of time.

Contact us today to see what kind of home equity options we offer.

 

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