Home Equity Loans in 2021 – What Homeowners Should Know
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Historically low mortgage interest rates over the past year have led to a surge in refinancing – pushing another type of financial product aside.
For many homeowners, home equity – in the form of home equity loans or lines of credit (HELOC) – has always been a go-to source of funding for things like home renovations, college tuition and even debt consolidation.
But with mortgage rates so low, people are mainly accessing their equity mortgage refinancing. The number of cash-out refinancing loans jumped by more than 40% from 2019 to 2020, according to Dr Frank Nothaft, chief economist of the housing data company CoreLogic.
Low mortgage rates won’t last forever. With experts predicting rising rates in 2021, When Will Home Equity Loan Be Worth Reviewing?
Here’s what a few financial experts are predicting.
Look at mortgage rates to predict home equity loans
When mortgage rates rise – as they are expected to do this year – and refinancing is no longer the primary choice for homeowners, “this is where home equity products will reappear as the main way to access home equity, ”says Greg McBride, Chief Financial Analyst at Bankrate.com.
Even as home equity loan rates become more competitive with refinancing rates, this type of loan comes with some additional complexity as a home equity loan or HELOC is added to your primary mortgage.
But just as mortgage rates are currently low, so are home equity products. So if you can get one now, and it makes sense to you, you’ll save on interest.
Impact of high house prices on home equity loans
High home prices have created uncertainty for home equity lenders.
“If you have sudden price jumps, you can also experience sudden price drops,” says Craig Lemoine, director of the Academy of Home Equity in Financial Planning at the University of Illinois. This helps explain why home equity lenders have been reluctant to extend credit due to fluctuations in home prices.
And volatile home prices aren’t going anywhere anytime soon, Nothaft predicts. The CoreLogic Home Price Index forecasts a 4.2% increase in national home prices over the 12 months ending December 2021.
What you’ll need to qualify for home equity loans in 2021
Home equity loans and lines of credit are even harder to access than they were before the pandemic, “but they haven’t tightened either. It’s always an environment in which you have to keep the skin in the game, ”says Greg McBride.
This “in-game skin” that McBride refers to boils down to two key things for owners: Fairness in your home, and your credit. The more equity you have and the better your credit rating, the better your chances of getting a good deal on a home loan or line of credit.
Your credit score and a measurement known as a combined loan value both play a role in the home equity loans that are available to you. If you are looking for a HELOC or home equity loan right now, or if you could be in the near future, you will need to meet more stringent conditions.
A low loan-to-value ratio
Your loan-to-value ratio (LTV) can be found by dividing the outstanding loan amount by the value of your home. Lenders consider higher LTV ratios (meaning you have less equity in the house) to be riskier.
“Most lenders aren’t really willing to go over the 80% loan value threshold for a second lien. Those that do are rare and may only affect existing customers, ”says McBride.
But, as lenders become more comfortable with the amount of pandemic debt, “they’ll get it down to the 85% to 90% level,” McBride says.
A combined loan-to-value ratio compares your total mortgage debt portfolio to the market value of your home. It means everything secondary mortgages – such as a home equity loan or HELOC – will be included in the appraisal.
A good credit rating
“Scores below 600 will find it difficult to get a HELOC,” Damsky says. “A good relationship with a bank can help secure more favorable terms.”
If your credit score isn’t quite up to par, be sure to take out all of your other loans. payments on time and in full, and keep your low credit use. These are two main factors used to determine your creditworthiness, so staying on top of the two can help you in the short and long term.