Interest rates can affect a person’s ability to purchase a home. Interest rates on home equity loans and home equity lines of credit are affected by the U.S. economy. When home values fall, so do home equity loans and home equity lines of credits. If a person keeps up with payments on an existing home equity or second mortgage loan they may be eligible for government relief. If a homeowner falls behind on payments for at least three months they are eligible for assistance from the American Housing Rebuilding Council. The Council offers programs that provide financial assistance for people whose home equity loans have been disqualified due to financial hardship.
The most common home equity rates are fixed rate loans. A person who purchases a home with a fixed rate mortgage has their interest rates locked in for the entire life of the loan. The interest rate on a fifteen-year fixed rate home equity loans is currently at 5.8%.
The difference between a fixed rate and variable-rate home equity interest rates is the flexibility of the loan. A fixed rate home equity interest loan rate is scheduled to remain at the rate of the mortgage for the entire duration of the loan. A variable-rate home equity interest loan rate is scheduled to change based on the credit score of the borrower. The variable rate home equity interest loans are more prone to speculative investments and fluctuation. Many people find these higher adjustable interest rates inconvenient.
Homebuyers who obtain fixed home equity loans with a low initial payment and low interest rates assume a loan amount of approximately twenty-five thousand dollars and a loan-to-value ratio of 80%. The assumption is that after a specific amount of time and no default payments the home equity would then increase to forty-five thousand dollars with a loan-to-value ratio of fifteen. As the years pass and payment schedule is established, the values of the loans change drastically. By the time the borrowers sell the home they have already achieved their initial investment of approximately twenty-five thousand dollars.
Adjustable-rate home equity loans are subject to changes in the credit score of the borrowers at any time throughout the term of the loan. For this reason, the borrowers must make adjustments to their monthly budget based on the anticipated change in interest rates. Some borrowers pay more than the minimum required payment each month in order to make up for the additional interest on the principal loan balance due. However, if the interest rate increases, so will the minimum required payment. The additional closing costs can easily surpass the savings made by adjusting the adjustable home equity rates.
Borrowers who pay off the loan early or roll the loan over will often receive a greater amount of cash upfront with lower home equity rates than borrowers who continue to make their monthly payments. In addition, early payoff offers the advantage of immediate tax deduction and interest rate reduction. These benefits depend on the borrower’s individual income, assets, debts, etc. If the additional funds are used solely for making the monthly payments, there are few benefits. The cash may be invested to earn a higher return, or the money may be used for other necessities.
A second type of loan, a fixed-rate loan, allows the borrower to borrow only what equity in the home is currently worth. Depending on the prevailing interest rate, the loan may provide either a fixed or an adjustable interest rate. This loan is good for people who anticipate an appreciation in the value of the home over time. The advantage is that the borrower has locked in the exact amount at which the loan was made and does not need to make adjustments based on current interest rates. If there is an increase in the loan amount, so must the borrower.
Fixed-rate equity loans typically come in two types: one-year and two-year loans. The first loan is set at the national average of interest rates for the period of time specified; the second loan is at the higher of the two national averages of interest rates at any time during the term. Interest rates are subject to change each year. Interest charged on both types of loans varies accordingly. For more information about fixed home equity rates, contact a reputable mortgage lender.