Historically low mortgage rates over the past year have spurred refinancing rates and pushed another type of financial product aside.
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.
But with mortgage rates this low, the main way people access their home equity is through mortgage refinancing. According to Dr. Frank Nothaft, chief economist at the housing data company CoreLogic, increased the number of refinancing loans with disbursements by more than 40% from 2019 to 2020.
At the same time, experts said 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 don’t last forever. If experts predict rising interest rates in 2021, when is home lending worth another look?
Some financial experts predict that.
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, senior financial analyst at Bankrate.com .
Even if home equity lending rates get more competitive with refinancing rates, this type of lending comes with added complexity because a home equity loan, or HELOC, is on top of your main mortgage.
But just as mortgage rates are currently low, so are home product rates. So if you can get one now and it makes sense to you, you will save on interest.
How high house prices affect home lending
High property prices have created uncertainty among home lenders.
“When you have sudden price spikes, you can have sudden price drops,” said Craig Lemoine, director of the Academy of Home Equity in Financial Planning at the University of Illinois. This helps explain why home lenders are reluctant to lend due to fluctuating home prices.
And the volatile real estate prices will not go so quickly, Nothaft predicts. The CoreLogic Home Price Index forecasts a 4.2% increase in national home prices for the 12 months to December 2021.
What You Need For Home Equity Financing In 2021
Home loans and lines of credit are still harder to access than they were before the pandemic, “but neither have they tightened. It’s still a skin-keeping environment in the game, ”says Greg McBride.
That “skin in the game” McBride is referring to boils down to 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 loan or line of credit.
Your creditworthiness and a metric known as the combined mortgage lending value both play a role in the home lending that is available to you. If you are in the HELOC or home equity loan market now or in the near future, you will need to meet more stringent qualifications.
A low loan-to-value ratio
You can find out your loan-to-value ratio (LTV) by dividing the outstanding loan amount by the value of your home. Lenders view higher loan-to-value ratios (meaning you have less equity in your home) as riskier.
“Most lenders are not really prepared to exceed the 80% mortgage lending threshold for a second lien. Those who do are rare and possibly only for existing customers, ”says McBride.
But as lenders become more comfortable with the size of the debt from the pandemic, “they will ease it back down to 85-90% levels,” says McBride.
A combined loan-to-value ratio looks at your entire mortgage debt portfolio against the market value of your home. This means that all secondary mortgages – like a home equity loan or HELOC – are included in the assessment.
According to Noah Damsky, a financial analyst at Marina Wealth Advisors in Los Angeles, you need a minimum loan value of around 620 and over 700 for better rates.
“With values below 600, it becomes difficult to secure a HELOC,” says Damsky. “A good relationship with a bank can lead to more favorable terms.”
If your creditworthiness is not quite up to date, make sure that you make all other loan payments on time and in full, and that you keep your credit utilization down. These are two important factors that are used in determining your creditworthiness. It can therefore help you to keep track of things in the short and long term.