Home Equity Loans Harder to Come By

It used to be easy. Walk into a bank and ask for a home equity loan. The banker would give you a one page form to fill out, and hold a mirror up to your face. If you fogged it, you would walk out with a loan up to 100% of the value of your home. You sometimes even got a special gift from the bank as well, like 2 tickets to an Anne Murray concert or a copy of “The Definitive Guide to Swordfish”. I often wondered if you even had to own a home. Those days are long gone.

While the rest of the real estate loan market is showing some improvement, the same cannot be said for home equity loans. Banks took huge losses on these loans as real estate values plummeted and the collateral they thought they had vanished. It is still possible to get a home equity loan, but only if you have very clean credit and only for a maximum of 80% of the value of your home, if that.

“The days of lenders falling all over themselves to help you empty the equity out of your home aren’t coming back any time soon,” said Keith Gumbinger, vice president at loan data tracker HSH Associates.

Even for homeowners with plenty of home equity still available, “access to it is harder to come by,” Gumbinger said. “You need to be a much higher-quality borrower now. And if you can get it, the terms are going to be a lot less attractive.”

Before the housing boom, home equity credit lines were a cheap way for homeowners to renovate their property, pay college tuition or buy a car. During the boom, they also were often used to make a down payment on a home or to finance a vacation or other indulgences.

As their losses grew, lenders began freezing equity credit lines — halting withdrawals — in early 2008. And the practice hasn’t stopped.”

Individuals with last names like Getty, Hilton, Buffett (both Warren and Jimmy), and Gates can still get them, but the interest rate they will have to pay has gone up. Where the going rate once was anywhere from 1/2% over prime to 1/2% below prime, the current rate is closer to 2 1/2% over prime.

According to Bankrate.com, the rate on a $30,000 home equity credit line averaged 5.77 percent last week, compared with 3.25 percent for the prime rate.

There doesn’t appear to be an end to this trend in the near term. Home owners, concerned about their own finances, are requesting fewer equity loans , and banks are approving far fewer of them, at higher interest rates. When it’s clear the real estate market has stabilized, foreclosures have abated, and values begin to increase, banks will likely begin to ease up a bit. This process is likely to be slow and the banks are going to be in no hurry to repeat the mistakes they made in the last cycle.

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