Q: I want to take out a home equity line of credit. Would the process be easier using my current mortgage lender or should I shop around? We only have only one mortgage.
A: In the current market, getting a home equity loan or line of credit approved will be anything but easy.
In today’s real estate market getting a home equity loan (HEL) or home equity line of credit (HELOC) has become quite difficult. In some cases, that difficulty is due to declining real estate values. But in other cases, some lenders just don’t seem to be as enthusiastic about approving home equity loan and line of credit applications.
Call it another casualty of the housing and credit crisis.
To compare mortgage rates for a home equity line of credit loan, you can go to your current lender’s website and see if your lender offers home equity loans and lines of credit at all. Then, see if the interest rate on those loans and lines of credit is competitive with what other lenders in your area are offering.
If you find that you can’t find anything about home equity loans or home equity lines of credit on their website, you might want to move on to a different lender. If you find that the interest rate the lender offers on a home equity loan or line of credit that you would want is significantly higher than other lenders, it’s a good bet that the lender isn’t particularly interested in doing them at the moment.
You might want to look elsewhere. You can go online to BankRate.com to figure out what local and online lenders are offering for their home equity loans and lines of credit. You should also check with a credit union, if you belong to one or can join one. Credit unions usually offer better rates on home and auto loans.
Once you have determined whether your current lender is or isn’t in the market to approve home equity loans or lines of credit, you can decide whether you should apply with them or another lender.
In past years, you could basically walk into a bank and walk out with a home equity line of credit up to $30,000 with a good credit score and with just about no questions asked. Today you should expect a lot more due diligence by the lender who approves your home equity line of credit application.
How much can you get with a home equity line of credit? Some lenders will only give you a home equity line of credit up to 70 percent of what the bank thinks your home is worth. If there have been declining values in your area, you might be surprised to find out that you don’t actually qualify for a home equity line of credit in any amount because your current loan exceeds that home loan-to-value ratio based on what the bank feels your home is now worth.
If you know that your current home loan-to-value ratio is somewhat less than the 70 percent, you might be able to get a small line of credit – but at a higher interest rate.
During the real estate boom years, you could get variable rate home equity line of credit at “prime minus 1.” That means that your interest rate would float based on the prime rate (which is currently 3.25 percent), minus 1 percent for an effective interest rate of about 2.25 percent.
Today, lenders are offering far less advantageous rates. In some cases, home equity line of credit rates offered today may be as high as the prime rate (3.25 percent) plus 2 percent or more, for an effective interest rate of 5.25 percent.
Some lenders will offer lower rates for higher lines of credit, so it pays to shop around and compare rates.
Also, check out the eBook on How to Save Your Home From Foreclosure