Mortgage Rate News

One of the questions that I have been asked a lot lately is this one:

How likely am I to get a home equity loan?

As with most personal finance questions, it really does depend on your personal situation. And what a mortgage lender is willing to for you (which is increasingly less and less). But there are ways to get a shrewd idea of how likely you are to get approved for a home equity loan.

Mortgage lenders are wary of giving out risky loans again. Gone are the days when you could get a second home mortgage for 90% of your home’s equity. Some mortgage lenders, believing that the real estate market would just continue appreciating at a rapid rate, were offering home equity loan options that amounted to 125% of a home’s available equity.

New expectations for home equity loans

Mortgage lenders now expect a little more in terms of the people they lend money to now. Bad credit home equity loans are becoming scarcer as mortgage lenders want borrowers with less risky credit scores. Many lenders want a credit score of at least 650 (which is lower than what many mortgage lenders will accept for a first home mortgage loan).

Additionally, many mortgage lenders want to make sure there is plenty of equity in the home. With home values dropping, lenders want to make sure that the homes used for collateral aren’t going to suddenly take a nose dive and be worth less than you owe on the home.

Finally, mortgage lenders are becoming more prone to verify income. Many mortgage lenders, who used to fudge income numbers in the past, as well as let some documentation slide, are tightening up requirements.

So, if you have plenty of equity in your home, and if you have sufficient income and good credit, you are likely to get a home equity loan.

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Right now, with liquidity for mortgage lenders a problem, and with the economy promoting inflation, mortgage interest rates on their way up. This means that those wishing to buy a first home — and especially those looking for a second home mortgage — things are getting a little expensive.

Rising mortgage interest rates mean you pay more money

Whether it’s a new home mortgage loan or a second home mortgage, the higher the interest rate, the more you will pay over the life of the loan. (Even on a $200,000 home mortgage loan, the difference between last week’s mortgage rate and this week’s is more than $10,000 total in interest.) This is an issue especially for those looking into mortgage loan refinancing. Many are finding that when they go to refinance from an ARM or an interest only loan, the newer, higher rate is still somewhat difficult to pay.

However, if those looking for second home mortgage loans do not lock in interest rates now, there is a good chance that, come August, they could see an additional rise in interest rates. The longer they wait, the greater the chance that interest rates will get even higher on mortgage loan refinancing.

Difficulties with mortgage loan refinancing

Increased costs due to mortgage interest rates are not the only problem plaguing those looking for second home mortgage loans. Getting mortgage loan refinancing is increasingly difficult because home values in many areas are falling. These home values mean that many homeowners are already upside down on their home loans. SO, mortgage lenders are not willing to provide mortgage loan refinancing. And that does make sense. Why would you risk it?

So, the current situation offers an interesting bind. Mortgage loan refinancing is needed in order to forestall foreclosures, but some people are in a position that precludes them from getting that financing. And, even worse, some are in positions where they can’t even afford payments on new home loans — even if they could get them.

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Bank of America is expected to see some serious losses with regards to home equity loans. Why? Because second home mortgages are connected to home value, and that means that as home values fall, losses due to home equity loans rise. Bloomberg reports on the current state of Bank of America:

The bank expects losses to top 2.5 percent of its $118 billion in loans linked to home values, Liam McGee, president of the Charlotte, North Carolina-based company’s consumer and small business division, said at a conference in New York sponsored by UBS AG. The bank previously projected a loss rate of between 2 percent and 2.5 percent.

Bank of America, the nation’s largest credit-card issuer, is also seeing a “recent sharp increase” in spending on necessities by its credit-card customers. That has curbed retail, travel and entertainment purchases, McGee said. Economists and bankers have said the economy may be teetering near a recession as consumers struggle with job losses and gasoline prices topping $4 a gallon.

You can also see that problems may be arising in the area credit cards as well. As more people have to turn to credit cards to cover the necessities, there could be real problems ahead.

This presents a combination problem: Home equity is tapped out, and credit cards are moving toward being maxed out. This is a trend that is sweeping the nation. The question is this: How long until Americans as a whole move from managing their debt to actually drowning in it? And consider: with home equity loans getting harder to come by, it will make it difficult for Americans to use debt consolidation to get a handle on their credit card debt.

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