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Cheap Loans Are Slowly Returning

[Dec 18, 2009.]


HELOC Originations Are Up

According to one agency that monitors statistics on home equity loan originations, those originations are up. Home equity lenders are still not originating new loans anywhere near the levels achieved during the housing boom, but levels are moving up instead of down. Home equity loans are becoming more available to qualified homeowners again, finally. This is excellent news, and hopefully a pattern that will expand and continue into 2010.

Home Equity Loans Are Still Cheap Loans

In many cases, compared to an auto loan, student loan, or credit card, the interest rates on home equity loans are the cheaper alternative. Before the housing bust, you might have expected a HELOC interest rate to be as low as 0.5% below the prime rate. Lenders are looking for a higher return on new loans in this market, but you can still get a HELOC rate at about 1.0% over the prime rate with a low loan-to-value ratio and good credit. For the last year or so, the prime rate has been at 3.25%. So, even in this new economy, HELOCs would be cheap loans at less than a 4.25% fully-indexed rate.

Guidelines Are Tighter

100% loan-to-value ratios are not as common today because of declining home values in many areas of the US. If the lender were to make a 100% loan on your house, and the value went down, the lender's mortgage would be unsecured at least partially. You may not be able to find a home equity loan that exceeds 80% of your home's appraised value. You may also be required to have at least a 740 credit score to get the best interest rate. These guidelines are significantly tighter than in past years, but that is to be expected considering the damage loan defaults caused in the housing market.

What Happens to Your Payment if Rates Go Up

Home equity loans are cheap loans as long as you manage them well. They do require participation because the interest rates on most HELOCs adjust. As the economy recovers, the prime rate is likely to increase, causing home equity loan payments to go up. For example, if you owe $100,000 and you're making interest-only payments at 4.25% today, and the rate goes to 5.25% next year, your payment will go from $354 to $437. Keep your balance low enough that a rate increase will still be affordable. Or, make sure you have enough money in the bank to pay down the loan if it gets expensive.


About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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