When most people think of a home loan they think of a mortgage, which is a large loan from a bank that makes it possible for most people to buy a home. Mortgages are usually hundreds of thousands of dollars and are designed to be paid over 30 years. When people talk about modifying a home loan, they are usually referring to changing the terms of their mortgage. There is, however, another type of home loan that is almost as popular – the home equity loan.
Home equity loans are usually much smaller than mortgages. Home equity loans are often used to pay down a high-interest credit card or consumer debt or it is used to pay for home improvements and other large purchases which require cash that most homeowners don’t otherwise have.
A home equity line of credit is also a type of home equity loan, though it’s based on a revolving amount of credit and allows you to take out only the amount of money you need instead of a lump sum. Home equity loans and home equity lines of credit are loans that are given to homeowners who have build up extra value in their home by paying down their mortgage and having their home value rise over time.
For example, if a home is worth $200,000 and the remaining mortgage that’s due is only $100,000 then the homeowner has the potential to borrow against their home’s current value – usually around 80%, or $80,000 in our example.
From 2005 to 2008 the rising home prices allowed many people to take out home equity loans even when they had only bought their home a year or two before. Now that home prices have plummeted in many parts of the world many of these people now owe more on their home than the house is worth in the seller’s market (this is known as being “underwater” with a mortgage).
Even people with perfect credit, plenty of equity in their house and a steady income are finding that banks are not giving out home equity loans like they used to. These days home equity loans are increasingly difficult to get for a number of different reasons.
Banks Were Hurt By Bad Mortgages – Home Equity Loans
While many, many homeowners lost their own homes and a good bit of their savings when the housing market crashed the banks also lost a lot. Many banks completely went out of business, many lost enormous amounts of credibility and value with their customers and many learned valuable lessons about over-extending themselves into the housing market.
So now many banks have moved their money into more stable markets and have purposely decided to limit the loans they give to homeowners who are using equity as collateral.
Weak Job Market
A weak employment market means that a lot of people are unemployed or underemployed right now so banks are fairly afraid of giving money out to people because even if they currently have a job. Many banks think the job market might still be unstable, so giving money to individuals is not considered a safe bet for many banks.
Home Values Are Unstable – Home Equity Loans
Experts are still torn on whether home values are on the way up or down. Many homeowners are still underwater with their mortgages. Banks don’t want to invest in housing if their investments will end up going down even further in the future. So while home values seem to be going up right now, banks are still unsure about whether this is just a blip or a real market trend.
Home equity loans are definitely much more difficult to get than they were just a few years ago. It isn’t impossible to get a loan against the equity on your home, but it’s pretty challenging at the moment. As the credit market loosens, home values rise and the job market gets stronger it will be much easier to get a home equity loan.