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Historically low mortgage rates over the past year have spurred refinancing rates and pushed aside another type of financial product.
For many homeowners, home equity – in the form of home equity loans or lines of credit (HELOCs) – has historically been a major source of money for things like home renovations, tuition, and even debt consolidation.
However, with mortgage rates this low, the primary way people access their homes is through mortgage refinancing. According to Dr. Frank Nothaft, chief economist at the housing data company CoreLogic, the number of refinancing loans increased by more than 40% from 2019 to 2020.
At the same time, experts say it was more difficult to qualify for home equity loans and lines of credit as lenders became more risk averse and increased credit requirements.
Low mortgage rates won’t last forever. If experts predict rising interest rates in 2021, when is home lending worth another look?
This is what some financial experts predict.
Take a look at mortgage rates to predict home lending rates
If mortgage rates rise – as expected this year – and refinancing is no longer the first choice for homeowners, “home equity products will reappear as the primary means of accessing home equity,” said Greg McBride, chief financial analyst at Bankrate .com.
Even if home equity interest rates become more competitive with refinance rates, there is added complexity to this type of lending because a home equity loan, or HELOC, is offered on top of your primary mortgage.
But just as mortgage rates are currently low, so are home product interest rates. So if you can get one now and it makes sense to you, you will save on interest.
How high property prices affect home equity loans
High house prices have created uncertainty among home lenders.
“When you have sudden price spikes, you can also experience sudden price drops,” said Craig Lemoine, director of the Academy of Home Equity for financial planning at the University of Illinois. This explains why home lenders have been reluctant to lend due to fluctuating house prices.
And volatile real estate prices will not rise anytime soon, Nothaft predicts. The CoreLogic Home Price Index predicts a 4.2% increase in national property prices in the twelve months ending December 2021.
What you need to qualify for home equity lending in 2021
Home equity loans and lines of credit are still more difficult to access than they were before the pandemic, “but neither have they tightened. It’s still an in-game skin care environment, ”says Greg McBride.
This “skin in the game” McBride is referring to consists of two key components for a homeowner: equity 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 equity loan or line of credit.
Your creditworthiness and a metric called the combined mortgage lending value both play a role in home equity loan availability. If you are currently in the market for a HELOC or home equity loan, or may be in the near future, you will need to meet more stringent qualifications.
A low loan-to-value ratio
Your loan-to-value ratio (LTV) can be found by dividing the amount of loan outstanding by the value of your home. Lenders view higher LTV ratios (meaning you have less equity in your home) as riskier.
“Most lenders are not really prepared to significantly exceed the 80% credit value threshold for a second lien. There are few that are only for existing customers, ”says McBride.
However, once lenders become more familiar with the size of the debt from the pandemic, “they will ease it back down to 85% to 90% levels,” says McBride.
A combined loan-to-value ratio looks at your entire mortgage debt portfolio compared to the market value of your home. This means that all secondary mortgages – such as B. a home equity loan or HELOC – should be included in the assessment.
A good credit score
According to Noah Damsky, a certified financial accountant at Marina Wealth Advisors in Los Angeles, you need a minimum loan value of around 620 and over 700 for better pricing.
“Scores below 600 will find it difficult to secure a HELOC,” says Damsky. “A good relationship with a bank can help to obtain more favorable terms.”
If your credit isn’t up to date, make sure you’re making all other loan payments on time, in full, and keeping your credit utilization down. These are two main factors that are used to determine your creditworthiness. Hence, it can help you keep track of both in the short and long term.