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Losing interest in home equity loans

Home equity loans, home equity lines of credit and cash out refinancing refinancing are all great ways to get some quick cash by drawing from the value of your home.

But with interest rates on the rise, many lenders are finding that people are not as interested in these types of loans as they were in the past, so they are coming up with new deals and promotions to lure people back into home equity loans.

The article, “Lenders push home-equity deals in a move to attract borrowers,” by Ruth Simon of The Wall Street Journal Online, discusses some of the ways lenders are trying to draw potential borrowers.

“ Home-equity borrowing has been a boon to consumers in recent years, essentially allowing them to turn their houses into cash machines. But with rates on home-equity lines of credit at a five-year high, demand is slowing, spurring lenders to keep their business growing with new promotions, rate cuts and other offers.”

Many banks and lenders are offering rewards like half a percentage point to people who take out new home equity loans.

Others are trying to push fixed-rate equity loans, since the main reason people are weary is because of rising interest rates. People took notice of these types of loans when interest rates were low, and they were using the cash to pay for everything from a vacation to home improvement repairs. But now, times are tougher, and people are realizing they may have gotten themselves in over their head.

“Yet if housing values fall, some home-equity borrowers could wind up owing more than their house is worth. And homeowners with credit lines are vulnerable to rising interest rates, which can make their monthly payments higher. Already, higher rates are fueling an increased interest in a different type of home-equity borrowing: loans, which offer a lump sum and a fixed rate, instead of credit lines.”

The major options for borrowing against the value of your property are a home equity loan, described above, a home-equity line of credit and cash-out refinancing.

“With a home-equity line of credit, borrowers pay a variable interest rate, typically tied to the prime rate, and get the right to borrow up to a certain amount, either all at once or as needed. With a cash-out refinancing, borrowers pull cash out of their home when they take out a new, larger mortgage.”

Although interest in these types of loans has definitely waned since interest rates have been rising, home equity transactions are still very important to lenders.

“ Home-equity borrowing has become increasingly important to lenders. Balances on home-equity lines of credit have climbed 71% to $543.2 billion over the last two years, according to an analysis by Equifax Inc. and Moody's Economy.com. Home-equity loans and lines of credit accounted for 10% of loans at commercial banks in the fourth quarter of 2005, up from 6.5% in 2001, and are the second-fastest-growing asset class, says Morgan Stanley analyst Betsy Graseck.”

“Yet growth is slowing. Total home-equity debt outstanding increased 9% in the first quarter compared with the same period a year earlier, according to Equifax and Moody's Economy.com. That's down from the first quarter of 2005, when the year-over-year growth rate was 25%.”

Taking out a home equity loan or line of credit is a big decision and should be considered carefully, so you do not end up in financial trouble.

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