Lower mortgage rates mean that home equity loans are an attractive proposition. Sadly, falling property prices, declining credit scores and tightened lending criteria mean that borrowing money has become increasingly difficult for homeowners. Despite Obama’s costly plan to provide greater liquidity, lenders are fearful about lending money when US unemployment is continuing to rise.
Mortgage Rates may not be as Low as They Appear
Tighter lending criteria and higher costs thwart homeowners seeking a home equity loan. Tara Siegel Barnard of The New York Times stated: “Borrowers face higher costs, from rising fees for mortgage insurance to added costs that drive up the mortgage rate. Lenders have become more cautious about whom they will lend to, as more people lose their jobs, watch their incomes decline and fall behind on their bills.”
Falling Property Values Push-up Mortgage Insurance Costs
Fair Isaac, who computes the scores for FICO, stated that approximately 48 per cent of US citizens have a score under 699. In the worst hit areas, including Arizona, California, Florida and Nevada, two insurers have already stated that they now require a homeowner to have a bare minimum of 10 per cent home equity and a credit score of upwards of 720.
Home Equity Loan Stumbling Blocks
- Property values have fallen dramatically which means that home equity loans are not possible. The Case-Shiller index shows that US house prices have fallen 29 per cent and are still falling. The largest falls have taken place in Phoenix (34%), Las Vegas (33%) and San Francisco (31%).
- Research from SMR shows that 22.4 per cent of all US mortgage holders are ‘underwater’ and struggling with negative equity. There remains few signs of a property market recovery.
- US unemployment is continuing to rise. The labor department produced statistics showing that the jobless rate had now increased to 8.9%. This represents the highest level of unemployment since September 1983.The Organisation for Economic Co-operation and Development (OECD) stated that US unemployment would reach 10.5 per cent by the end of 2017.
Borrowing Money Through the Federal Housing Administration
A number of homeowners have found that borrowing money is easier when they go through the Federal Housing Administration. Many have reported being able to get home equity loans with less than 20 per cent home equity. Borrowers are likely to face higher interest rates and a 1.5 to 1.75% up-front fee. The majority of homeowners who are seeking a new home equity loan are likely to be disappointed. Borrowing money is more difficult. The best mortgage rates are only available to the lowest risk customers who have managed to avoid negative equity, despite falling property values.