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US spending will slow because it is more expensive to borrow, and because consumers will see less home equity to borrow against. Oil prices have fallen and may help offset some of the bumps in the market, suggesting that consumers may slow down, but prices are unlikely to reverse unless mortgage rates continue to fall.
In today’s economy home equity loans are available as subordinated loans with any amount from the equity in collateral to 100%. A few non-conforming equity lenders will offer 125% of the home value balance minus the first mortgage balance. If the property has a first and second mortgage that is 100% of the value of the property and interest rates fall below both mortgage rates, the lender may refinance at 100%.
Lenders who participate in 100% financing will require the borrower to obtain Private Mortgage Insurance (PMI). The PMI is temporary and will be revoked when the home value rises and a low balance causes the loan to fall below 80% of the mortgaged property. No PMI is required with home equity loans.
The most common method used to refinance higher rate home equity loans is an equity line of credit or a home equity loan. Both types of equity loans have a reasonable closing cost depending on the state in which the borrower lives. In a home equity loan, the cash is disbursed in advance, whereas in an equity line of credit, the money is reserved for the borrower and he can draw on it 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 linked to an index.
If the property is mortgaged at more than 80% of the fair market value, the mortgage lender will require a higher interest rate. If the second mortgage is close to 100% collateral used for collateral, the lender may ask for a premium on the loan to offset the risk it is taking.
A mortgage lender holding a home equity loan if notified of a default scenario must purchase the first mortgage to protect its interest in the property. If the home has an 80% first mortgage and a security value of $100,000, the second lender, in order to protect its interest on the foreclosure, must satisfy the first mortgage to obtain the property.
If the second mortgage has the first and second mortgages equal to or less than 80% of the value of the property, the interest rate will have little or no premium. Equity loan rates vary based on the equity to value, credit score, and loan amount.
