Home Equity Loans – Are They nevertheless obtainable?
The home equity loan market has shrunk along with many Americans’ home equity, meaning that arranging a loan secured by the house value has become increasingly difficult and expensive. Here, I will analyze the reasons behind this situation.
Falling home values
Home equity is the term used to describe the portion of the home that is truly owned by the homeowner. So, as an example, if some one owns a $200,000 home and has borrowed no money against it, they would have $200,000 of equity in the home. As another example, some one who owns a $200,000 home, however has an noticeable mortgage on the character of $100,000 would have $100,000 in equity. Simple mathematics.
Now to a more realistic example – Some one has purchased a $200,000 house, using a $180,000 mortgage, and the home has since fallen in value by 25% to $150,000. They would now be considered to have “negative equity,” in that they owe more money on the house than it is worth. They have no equity in the house and will not be getting a “home equity loan.”
Home values in the USA have fallen to around 2003 levels, meaning any buyer who purchased a home using a mortgage in the last six years is almost certain to have no equity. In fact – at the time of writing this (August 2009), only 5% of American homeowners with a mortgage have positive equity in their home. The other 95% are underwater, and almost 14% have more than -25% equity. None of these people are going to be able to position a loan, because they keep up no equity.
Increased lending criteria
As the edges have continued to suffer heavy losses, and the amount of foreclosures continues to increase, they are being forced to return to rational lending practices. The 100% home equity loan is a thing of the past, along with the so-called “liar loans,” and 125% Jumbo loans.
This they have increased their lending criteria to the point where they will only consider a home loan of 80% of the value of the home. Once the fact that home values have fallen drastically is taken into consideration, this method the home equity loan is a scarce beast.
In summary, the home equity loan market is doubtful to pick up in the near future, for the simple fact that very few have any home equity to borrow against. This does not average that it is impossible to position a home equity loan, but it is important to know the value of the home and truly have some equity. This is another issue currently being faced – with falling sales volumes, it is becoming increasingly difficult to precisely value any real estate, and consequently more difficult to precisely estimate the level of equity. One thing is for certain; the edges will err on the side of caution when doing so. Homeowner loans are currently only obtainable to borrowers with a “good” credit score and equity to borrow against.