Before the recession, many people were able to tap into their home equity but all this changed during the last few years. However now house prices are recovering, more people have regained access to this source of funding that can help pay for renovations or big-ticket items, or to simply reduce debt.
According to an article in CNNMoney.com, home equity lines of credit were up 27% to the year ending June 30, and this trend is expected to continue. While it’s tempting to consider using a home equity loan, there are things you need to know about this source of funding.
Over the past few years mortgage rates have been at near historic close with many borrowers getting 30 year fixed mortgages for just 4% or even less. That’s about to change as rates are expected to rise, and experts think things could get rather more unsettled. The Federal Reserve had a quantitive easing monetary policy in place to help keep rates low, but that’s due to end next month. If you currently have your mortgage locked in to a very low rate, then a home equity loan could be more cost-effective than refinancing the entire mortgage. If you choose to refinance your loan now, there’s a chance that you’ll end up paying as much as a percentage point more than the cost of your original loan, and this will be payable on the whole of the loan balance. Home equity loans tend to be quite competitive, but the rates can rise. Even so, you would any be due to pay the higher rate on the amount of credit taken out.
The fees associated with taking out a home equity loan are cheaper than refinancing. This is because it’s often necessary to have a home inspection and to have to get a new title search and insurance, as well as attorney review fees. These costs can mount up to several thousand dollars. In comparison, lenders will sometimes provide home equity loans without any upfront costs, and fees are covered by a slightly higher interest rate.
Another benefit of sticking to a home equity loan is that the payments remain on the same schedule, whereas if loan is refinanced the clock will reset. This means even if you’re several years into paying off your loan, making the first payment on your new loan will effectively reset the clock to month one. It’s different however if you choose to reduce the overall time of the loan, increasing the payments made each month.