When interest rates rise, homeowners stop refinancing to get cash out and start choosing the home equity loan programs because it enables them to preserve their low interest rate on their current mortgage. Homeowners love the freedom to utilize a home equity loan for a wide range of purposes, but it is advisable to refrain from using this financial resource for expenditures like vacations.
Such expenses do not contribute to long-term wealth and cannot be recovered. Most borrowers choose a home equity loan to finance home repairs, debt consolidation, education or to start-up a new business. One of the areas of real estate finance that is being forecasted to see more activity is in home equity financing. As you may already know, the home equity loan is a form of a second mortgage on one’s house.
Why High Interest Rates Are Making Home Equity Loans More Attractive
In today’s dynamic financial landscape, home equity loans are gaining renewed attention due to the presence of high-interest rates. Homeowners are increasingly looking at their properties as a source of financial stability, leveraging their home equity to tap into attractive borrowing opportunities. Here’s a closer look at why high-interest rates are making home equity loans a more appealing option for many.
As first mortgage rates across the lending market climb, home equity loans remain an attractive proposition due to their relatively lower interest rates compared to other lending options. Home equity loans typically come with fixed interest rates, which means that homeowners can secure an affordable monthly payment.
In the past, home equity programs would rolled out by banks when interest rates switched direction, because homeowners always need access to cash, but sometimes they don’t want to refinance their current mortgage because they already have an interest rate below the market-level. The home equity loan is the alternative to cash out refinancing for homeowners looking for a hedge against rising interest rates. Explore more comparisons from home equity loans vs cash out refinances. The other popular 2nd mortgage today is the HELOC loan. The HELOC stands for home equity line of credit and revolves like a credit card and you only pay interest on the amount you actually access.
The home equity loan program allows you to tap your equity in the property so that you can fund some type of purchase, including:
- Paying for a college education
- Renovating the home
- Investing in real estate
- Paying off high interest debt
- Capital to start a new business
Some people think that we could see more people taking out a home equity loan in the coming years under the Biden administration. Here are the big reasons why:
#1 First Mortgage Rates Are High
The Federal Reserve has been hiking rates constantly over the last 3 years. The first mortgage rates have doubled in the last 4 years and therefore homeowners would rather get money from a home equity loan than by refinancing their already low rate first mortgage.
#2 Consumer Confidence is Low
In October of 2023, the consumer confidence index plummeted to levels not seen in more than 40 years. The reason for this could be that people were feeling concerned about soaring inflation and rising interest rates.
If the labor participation rate rebounds and the home-ownership rate for Millennials rises, then we anticipate home equity exploding. When people feel more confidence in the future, they are more likely to buy things.
They also are more likely to take out equity loans. People taking out home equity loans and the masses suggest that people are feeling confident enough about their finances to refinance their personal debt on their own residence.
It remains to be seen if the high consumer confidence index will last, but so far, people seem to be looking to home equity programs with more optimism. It will be interesting to see what the credit standards and home equity loan requirements are in the next few years as the mortgage industry rebounds.
#3 Home Equity Rates Are Competitive
While it is possible that rates could go up in November 2023, home equity loan rates are still very attractive. As people are feeling more confident in the future under a Trump administration, we think that they will be more likely to buy things on credit. Rather than putting expenses on a high interest credit card, some people will likely decide to buy things with the very low interest equity loan secured by their home in the form of a second mortgage.
- Lump-Sum Loans with Fixed Home Equity Rates
- Open-Ended Credit Lines with Adjustable HELOC Rates
- Rehab and Permanent Construction Loans
As long as interest rates on equity loans stay under 9%, we think it is likely that increased economic activity could lead to more people buying goods and services with rising equity. Most industry experts believe that home equity loan rates will remain on the low side when looking at a graph over a 10-year period. Borrowers like fixed equity loans and interest only HELOCs. Read more about the Home Equity Loan vs. HELOC.
#4 Housing Market Could Take Off
The stock market remained steady in 2023, despite high inflation. We believe that this portends a jump in the housing sector, and prices of homes could see a jump in the next two or three years. If that pans out, homeowners will want to take advantage of the increasing market to sell their home.
Before people sell their home, they often fix it up by leveraging the equity they have in their property. With a house equity loan, homeowners have the chance to increase the value of their property by doing renovations.
Increasing home prices will cause a surge in equity, and this would definitely would make people take out home equity loans. Many homeowners will borrow $25,000 or more to make major renovations to their home. By fixing up the kitchen and bathroom, for instance, they will be able to sell their home for a higher price than before.
One of the most popular reasons that homeowners get home equity mortgages is to make home improvements, which result in more money in your pocket when you sell.
Appreciating house values would help people with credit issues, because they would have more equity, a lower Loan to Value and a stronger likelihood of getting approved for a home equity loan with bad credit. We continue to hear whispers of more subprime lenders returning, so hopefully this will mean more poor credit equity loan programs on the horizon.
The Reality of Home Equity Programs
A new presidential administration is often a time of greater economic optimism, and many people believe that Trump’s business and real estate experience could result in much stronger economic activity in the next four or more years.
Get the straight scoop on how to stretch your savings every month with a simple interest home equity loan.
If Trump turns out being able to get America into 4-5% economic growth again, this will cause people to be looking for the best home equity loans in an effort to enjoy the higher value of their houses.
Best Home Equity Loan Tips for Minimizing Consumer Debt
If you are tired of paying high interest on charge cards and student loans and you thinking about pulling the trigger on a home equity loan, there are some important things to know.
You Have to Have Equity
Equity is the amount of the home that you actually own, compared to what you owe the bank. So, if you have a home that is worth $250,000 and you owe $200,000 to the bank, you have equity of $50,000 – 20%.
This value is most often described as a loan to value ratio, which is the remaining balance on the home loan compared to what the property is worth. The above case would be 80.
In the past, most home equity lenders want you to have a minimum 80% LTV after you have taken out the home equity loan. So you need to own more than 20% of the home before you are able to qualify for the loan.
So, if you have a home that is worth $250,000, you will probably need to have an equity stake of 30% in the home, or a loan balance no higher than 175 k, to get a $25,000 home equity loan. Today, some 2nd mortgage lenders are willing to take risks with borrowers that have good credit scores and solid income.
Borrow As Much As You Can
We don’t mean to encourage debt you cannot afford, but banks do not issue home equity loans or HELOCs for $1,000. The smallest loan you can usually get is $10,000, and some lenders won’t do anything smaller than $25,000.
If you need a smaller amount, home equity lines may be a better option. You can qualify for, say, $20,000 and only use $5000 if you like. You will need to have that $20,000 in home equity, but you do not have to use it all if you do not want to.
Takeaway on the Soaring Popularity of Home Equity Loan Products
The current environment of rising interest rates has led many homeowners to consider home equity loans as an attractive financing solution. With competitive home equity rates, and the security of collateral, home equity loans offer a reliable and cost-effective means of accessing funds when needed. However, it’s important to approach home equity loans with careful consideration, ensuring that they align with your financial goals and capabilities. Consulting with a trusted financial advisor or mortgage professional can help you make an informed decision about whether a home equity loan is the right choice for you.
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
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