American spending will slow because it is more expensive to
borrow, and because consumers will see less of an increase in home
equity to borrow against. Oil prices have dropped and may help offset
some of the obstacles in the marketplace, suggesting that consumers may
slow down, but prices are unlikely to go into reverse unless mortgage
rates continue to be lowered.
In the current economy, home equity
loans are available as sub-prime loans in any amount from the equity in
the collateral to 100%. A few non-conforming home equity lenders will
even offer 125% of the home value balance less the first mortgage
balance. If a property has both a first and second mortgage equal to
100% of the property value and interest rates have dropped below both
mortgage rates, the lender may do 100% refinancing.
Lenders who
are involved with 100% financing will obligate the borrower to acquire
private mortgage insurance (PMI). PMI is temporary and will be canceled
when the home value goes up and the balance decline causes the loan to
drop below 80% of the mortgaged property. There is no PMI required with
home equity loans.
The most common methods used to refinance high
rate home equity loans is an equity line of credit or a home equity
loan. Both types of equity loans have reasonable closing cost depending
on the state in which the borrower lives. In a home equity loan the
cash is disbursed up front, while in an equity line of credit the funds
are reserved for the borrower and he may draw on them as needed. This
is referred to as the draw period. Both a second mortgage and an equity
line of credit may have a fixed interest rate or an adjustable rate tied
into an index.
If a property is mortgaged above 80% of the fair
market value, the mortgage lender will require a higher rate of
interest. If a second mortgage is close to 100% of the security used
for 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
notice of default scenario, would have to buy out the first mortgage to
protect their interest in the property. If the home had an 80% first
mortgage and a security value of $100,000, the second lender, in order
to protect his interest at foreclosure, would have to satisfy the first
mortgage to acquire the property.
If the second mortgage only made
both 1st and 2nd mortgages equal to or less than 80% of he property
value the interest rate would have little or no premium. Home equity
loan rates will vary depending upon equity to value, credit score and
loan amount.
