Home-owners have seen the equity in their home increase the last few years, and interest rates are on the rise. Rather than refinancing their first mortgages and possibly getting a higher interest rate, more home owners are opting for a home equity loan that provides a clear and simple path to receive cash back cost-effectively.
Home equity loans are considered a second mortgage on your home that has a low, fixed interest rate that does not vary over time. While home equity rates are higher than first mortgages, current home equity loan rates are in the 6-7% range for people with good credit.
Top 6 Reasons the Home Equity Loan Will Drive Opportunities for Consumers to Access Money in 2019
There are many good reasons that the home equity loan will continue to support cash out opportunities for the next year:
#1 One Out of Four Homes with a Mortgage Is Equity Rich
Recent data released by Attom Data Solutions revealed that 25% of home owners with a mortgage have significant equity in their home. This means that their outstanding mortgage balance is less than 50% of the value of the home. Because home prices are going up, equity is increasing, and this will lead to 1.6 million new home equity loans in 2018, according to Trans Union.
#2 It Is Easier to Quality
People who owned a home in 2008 probably remember how much more difficult the home lending environment became as lenders cracked down on lax lending practices. In 2018 and 2019, lenders are beginning to loosen up. More than 10% of major banks in the US have eased credit standards for home equity loans and home equity lines of credit. In most cases, you will need to prove with ample documentation that you have the income to pay the loan, though. For most people, this means pay stubs, W-2s and tax returns.
Home equity lenders usually want you to have a credit score in the high 600’s or low 700’s to qualify. If you have low scores and equity you need to search for a lender or broker that offers home equity loans for poor credit.
#3 More Digitally Processed Home Equity Loans
Many home owners know they have a lot of equity in their home but may not want to go through the hassle of getting a home loan. Well, these folks have good news – Figure Technologies, which is a startup related to SoFi, recently launched a digitally processed home equity loan that can reduce approval times to just a few minutes for many borrowers.
The fixed interest home equity loans that will first be made available are home equity loans ranging from $15,000 to $100,000. These loans usually have five-minute approval times, and five days to get the funds with digital processing. This compares to 45 days it may take to get a regular home equity loan.
The founder of the company told the media recently that these new digital home equity loans are popular because it reduces the need to produce paperwork, upload, take trips to the notary, etc.
The system is using block-chain technology to track and record information for each loan.
Products available in 2018 and 2019 include loans with a 6% interest rate, with repayment terms between five and 15 years.
#4 Interest Rates Are Rising
Even well into 2017, interest rates for 30-year, fixed rate mortgages were below 4%. Those days are over. As of October 2018, interest rates are about 4.75% and generally rising. Five percent mortgages are expected soon. This means that rates for home equity loans will be going higher, as well.
A rising interest rate environment means more people are pulling the trigger on a home equity loan before rates climb much higher. With a home equity loan, you will have a low, fixed rate locked in no matter what happens to interest rates in the future. Check today’s home equity rates.
#5 Home Equity Loans Are Fixed Rate Loans
The housing crash of 2007 and 2008 naturally made people leerier of pulling out equity. Some home owners also are reluctant to sign onto a home equity line of credit because the interest rate varies over time. Who knows if the rate will shoot up in three years?
With a home equity loan, you know exactly what your payment and term will be from day one. You have a fixed rate and fixed term loan. Typical rates are 6% or 7% depending upon your financial qualifications.
#6 Tax Deduction Still Available in Some Cases
The new tax laws passed by the GOP congress and President Trump have eliminated some of the mortgage interest deductions that were previously available. But in 2019, you still will be able in most cases to deduct the interest on your home equity loan if the money is being used for home renovation purposes and will substantially add to the value of the property.
Many home owners are using their equity on home upgrades because property values are rising. This can make home renovations a good investment if you are planning to sell your home soon.
Which Is Better for Cash Out, a HELOC or a Home Equity Loan?
If you need a large amount of cash for college tuition or a home renovation, the equity in your home may be the best place to find it. With a cash out refinance, home equity loan, or home equity line of credit, you can use the equity in your home and get the cash that you need.
Each of these loan products works differently, so it is important to understand the different aspects of each loan before you select one. This article will show you how each loan product works and the possible costs, as well as advantages and disadvantages.
Cash-Out Refinance Mortgage
A cash out refinance replaces the 1st mortgage you have now with a new loan with a larger balance. The benefit for you is you take the difference in cash between the old loan and new loan in cash, so you can use that money as you like. If you have a home worth $250,000 and you owe $100,000, you might refinance 85% of the value and take back the difference in cash.
The major advantages of a cash out refinance is that you can tap the equity in your home to consolidate debt or achieve other goals. Second, interest rates for first mortgages are often lower than HELOCs and home equity loans. You get your funds in a lump sum and you pay interest on it from the beginning.
On the down side, a cash out refinance requires a new first mortgage, so you will have higher closing costs than with a second mortgage. Redoing your home mortgage may cause you to owe more on the house for years longer too. If you do a refinance, you may end up with less than 20% equity, which will require private mortgage insurance.
Revolving Home Equity Line of Credit or HELOC
A HELOC is a revolving loan like a credit card that uses your house for collateral. Generally, lenders who have HELOCs to offer have a line of credit in mind that is based upon the current appraised value of the house. Note that a HELOC works like you a credit card: You will not be charged interest on your line of credit until you start using it Whatever portion of your line of credit you have used, that is the part you pay interest on.
Some HELOCs have 20 year terms with a draw period of 10 years when you can borrow from it. Once the draw period is over, you will probably need to start paying back principle and interest.
On the upside, you can get a low introductory rate on most HELOCs that will make it very affordable, at first. You only need to repay the money you have borrowed, so you could get lower payments each month if you do not borrow the maximum amount.
On the downside, interest rates for HELOCs vary. Your monthly payments can go up, and can go up a lot if rates spike. You also may need to pay for ongoing fees beyond your initial closing costs of the loan, including maintenance fees and transaction fees.
Many of these loans have interest only repayment at first, so you only need to pay interest during the draw period, which is usually 10 years. After that, the minimum payment rises as you pay back principle.
Fixed Rate Home Equity Loan
A home equity loan is much like a HELOC in that it is a second mortgage that allows you to borrow against the value of your home. But the home equity loan has you take out a lump sum payment at the beginning. You pay interest on the entire sum from the start, and the monthly payments are fixed. HELOCs are more popular because they have lower initial interest rates, but a home equity loan has a fixed rate you can count on for the life of the loan.
One possible downside, in some cases the closing costs for a home equity loan could be higher than for a HELOC.
All of these loan products can work well for you based upon your situation. Generally, if you are happy with your first mortgage rate, leave it alone. Get a HELOC if you want to pay interest as you go and only need to take out smaller chunks of money at a time. Go with a home equity loan if you want a fixed interest rate and want to get all the money you can at once.