US spending will slow because it is more expensive to borrow and because consumers will see less of an increase in home equity against which to borrow. Oil prices have come down and may help offset some of the headwinds in the market, suggesting that consumers may slow down, but prices are unlikely to pull back unless mortgage rates continue to come down.
In today’s economy, home equity loans are available as subprime loans in any amount from the principal of the collateral up to 100%. Some non-conforming home equity lenders will even offer 125% of the balance of the home’s equity minus the balance on the first mortgage. If a property has a first and second mortgage equal to 100% of the property’s value and interest rates have fallen below both mortgage rates, the lender can refinance 100%.
Lenders that are involved with 100% of the financing will force the borrower to purchase private mortgage insurance (PMI). The PMI is temporary and will be canceled when the home’s value goes up and the balance goes down and the loan falls below 80% of the mortgaged property. A PMI is not required with home equity loans.
The most common methods used to refinance high-rate home equity loans are a home equity line of credit or a home equity loan. Both types of home equity loans have a reasonable closing cost depending on the state in which the borrower lives. In a home equity loan, cash is disbursed up front, while in a home equity line of credit, the funds are reserved for the borrower and can be withdrawn as needed. This is known as the draw period. Both a second mortgage and a home equity line of credit can have a fixed interest rate or an index-linked adjustable rate.
If a property is mortgaged above 80% of the fair market value, the mortgage lender will require a higher interest rate. If a second mortgage is close to 100% of the security used as collateral, the lender may ask for a premium on the loan to offset the risk taken.
A mortgage lender holding a home equity loan in the event of a notice of default would have to purchase the first mortgage to protect its interest in the property. If the home had an 80% first mortgage and a security of $100,000, the second lender, to protect its interest in foreclosure, would have to honor the first mortgage to acquire the property.
If the second mortgage only made both the first and second mortgages equal to or less than 80% of the property’s value, the interest rate would have little or no premium. Home equity loan rates will vary based on equity value, credit rating and loan amount.