What You Need to Know about Home Equity Loans

Many home owners want to pull some equity out of their home (if they were lucky enough to buy before the real estate boom then bust) and use the proceeds to pay off debt or use as a nest egg.  But it’s not a good market for home sellers and buyers are leery about signing on the dotted line so selling the home isn’t an option.   Refinancing your home or obtaining a home equity loan are two options. If you’re considering refinancing your home you should know about home equity loan rates.

Rates differ by geographic area. If you think that rates are standard across the country or even by state, think again.  They can vary from city to city.  The rates are set by the federal government and the banks.   Where you live will have an impact on how much you pay in interest.

Rates vary based on the principal of the loan and the term. Lenders make money based on the interest rate and for how long they will receive that interest rate.  A 15 year mortgage may not have a lower interest rate than a 30 year mortgage.  A loan for $200,000 won’t generate as much income for the lender as a $350,000 loan, so the interest rates may vary.  

Adjustable rate mortgages (ARM) have different rates than Fixed rates.  An ARM varies based on several indices including the rates on 1-year constant-maturity Treasury (CMT) securities and/or the Cost of Funds Index (COFI).  The adjustment is usually done twice a year and can only be adjusted within a certain number of points.  Fixed rates are rates that stay the same throughout the life of the mortgage, regardless of the change in the CMT, COFI, or any other variable.

Credit history and scores affect rates. Lenders know that someone who has defaulted on a previous loan, is having trouble making payments, or has recently obtained additional credit may be on the brink of financial disaster.  All that information is contained in your credit history.  Risky loan prospects pay a higher interest rate, if they qualify for a loan at all.

Even those who have always made their mortgage and other loan payments on time may find their credit score has dropped because credit card companies have lowered their available credit, or closed an account. Both of those acts can penalize an otherwise good credit history.

These days if you want to be considered for a home equity loan, or to refinance your mortgage, you will need a good to excellent credit history and score.  But that’s not all. The standard used to be a 80:20 ratio of debt to equity for your home.  In other words if your home was worth $200,000 you could have expected to obtain a mortgage of $160,000.  Currently since home values have been falling in many areas of the country, that ratio isn’t standard any longer. Another change is that no doc loans have vanished.  Employment, income levels, and assets all have to be independently verified for loan approval.