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Have you gotten a pitch from your bank? As the home equity lending business heats up, and banks step up their outreach, here are a few things you need to know:
You need equity
To qualify, you need to own more than 20 percent of your home. Lenders are going to want you to have at least an 80 percent loan-to-value ratio, which is the remaining balance on your loan compared with the value of the property. With almost 3.9 million U.S. homeowners freed from negative equity in 2013 and the rate steadily declining across the country, more people will qualify for these home equity loans. During the housing boom, you may recall that standards were just a little “different” … in some cases, non-existent.
Income, credit score important
Sure, banks are looking to speed up sluggish revenue growth by jumping back into the lending game, but they’re being cautious about who they lend to — and rightly so. Don’t expect the loan approval process to be easy. In addition to having ample equity in your home and a strong credit score, you must also have income to make your payments. Remember: you’re using your home as collateral. Fail to make your payments and you run the risk of losing your home. Banks are also making sure that you understand the repayment period.
Know what you want
Does your house need a new roof? Are you interested in consolidating high-interest debts or do you have a large, single expense you need to borrow money for? Then a home equity loan, which usually comes with a fixed monthly payment and interest rate, is best for you. If, on the other hand, you need access to money over a period of time for ongoing expenses (perhaps you have some long-term home improvement projects you’d like to work on), then a home equity line of credit (HELOC), would make better sense. HELOCs usually have a variable rate that’s tied to the prime rate, plus or minus some percentage.
While big banks used to dominate the home equity lending market (and you should certainly discuss your objectives with banks with which you currently have relationships), credit unions, regional banks, and others have emerged as formidable competitors. These players avoided much of the fallout from the housing bubble, and have been leading the way in granting new home equity loans and lines of credit to creditworthy borrowers. Plus, they tend to charge lower rates.
Zillow Projections: +3% nationally in 2014 While 2013′s double-digit gains in home appreciation were certainly economically beneficial (home prices are back at their peak levels in some areas), let’s be realistic: they’re not sustainable.This year, expect home values to continue to rise but at a more modest, balanced pace of about 3 percent, nationwide.
Zillow Projections: 5% As the Fed tapers its bond-buying programs and the economy continues to improve, expect mortgage rates to rise from a current level of about 4.6 percent to 5 percent by the end of 2014, making homes more expensive to finance. For example, the monthly payment on a $200,000 loan will rise by about $160. But there’s a silver lining for potential home buyers: it should be easier to get a mortgage this year because higher rates have slashed refinancing activity, prompting some banks to ramp up their purchase lending. Additionally, there will be more inventory on the market, and less competition from investors, as the home-buying process becomes less frenzied.
Zillow Projections: +2.5% nationally in 2014 Rents have been rising for some time and there’s no end in sight, especially now, when the market is seeing limited supply coupled with high demand. The foreclosure crisis, tight credit conditions and economic uncertainty have forced more Americans to rent. Expect rents to continue to rise throughout 2014, so budget accordingly. Research prices in your area with tools such as Zillow’s Rent Index, maintain good credit, and consider bringing in roommates so that you don’t become a statistic. According to a recent report by Harvard Joint Center for Housing Studies, half of all U.S. renters are spending more than 30 percent of their income on rent, up from 19 percent a decade earlier.