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.