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Home Equity Line of Credit Rates Higher Than Long-Term Mortgages

[Apr 21, 2009.]


The New York Times recently published an article that discussed why rates for home equity lines of credit, which are tied to the prime rate, are currently trending upwards.

Traditionally, financial professionals have advised clients to obtain home equity lines of credit and keep them open as a back-up to an emergency fund. This is becoming more difficult to do, however. Qualifying for a new home equity line of credit has become more difficult, avoiding credit line reductions is a challenge, and the terms for new equity lines of credit have become less aggressive.

The prime rate is currently at 3.25 percent. Historically, good borrowers could obtain a home equity line of credit at prime minus one half of a percentage point. In today's market, that would be an interest rate of 2.75 percent.

Now, according to New York Times, the average is currently 5 percent which represents prime plus 1 and three quarter percentage points.

There is also a disparity in various parts of the country with regards to what terms are available. The best home equity rates are available in areas where default rates are lower and property values are declining less rapidly.

Rates have also risen on home equity lines of credit because less banks are offering them. The reduction in competition has resulted in less favorable terms for equity line shoppers.

A homeowner with good credit (scores above 720) with more than 20 percent equity in their home along with a stable job and income can still find a new home equity line of credit.

The article goes on to mention that if you already have a home equity line of credit and it hasn't been closed or the credit line hasn't been cut, you should breathe a bit easier . “If they were going to cut yours,” Cameron Findlay, the chief economist at LendingTree said, “they probably would have already done it by now.”


About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.

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