Home Equity Loan, Credit Line Rates & No Equity loans

One of the best benefits of being a homeowner is getting the opportunity to get cash out.  Borrowers can choose from a home equity loan or a cash out refinance loan.  The home equity loan is a second mortgage and cash out refinancing is the process of reworking your first mortgage.  If a homeowner already has a low fixed rate mortgage at 5% or lower than an equity loan can be appealing because it allows you to get a cash out second mortgage without touching the mortgage you already have.  If a borrower has an interest rate above 5% and/or it’s not a fixed rate mortgage, then cash out refinancing is an ideal opportunity for borrowers to reduce their interest rate while getting access to cash. 

The fees and closing costs on refinance loans are typically higher than home equity loans, but in today’s competitive market you may be able to qualify for a no cost home refinance, so discuss your options with your lender prior to jumping to conclusions.  Read the original Article > Cash Out Refinance Versus Home Equity Loans

Record low home equity rates apparently have not gotten the attention of homeowners nationally.  According to Arthur Nourian, finance writer for the Home Equity News Source, “Home equity lenders have made it difficult for the average homeowner to qualify for an open end  home equity line of credit or a fixed rate second mortgage, because the guidelines are not realistic in today’s tough economy.” When it comes to refinancing, Nourian said, “Borrowers are more savvy today and they the application volumes are dropping because most homeowners know that do not qualify for cash out or a simple rate and term refinance for that matter.”    

First Horizon Announced Higher Second Quarter Profits

First Horizon National Corporation is one of the largest home equity lenders in the nation.  When it was reported this week that the home equity loan company announced a profitable second quarter of this year, we had to post the good news.  As reported, the home equity loan business has been turned upside down in the last few years due to tighter lending guidelines as home equity lenders are less willing to take risks. 

First Horizon attributed their second quarter success to the improvement of credit quality.  “Second quarter’s results demonstrate that the successful execution of our strategic plan is paying off. I am extremely proud of our employees who have worked tirelessly to help position us for the future. Bryan Jordan, First Horizon CEO said, “We remain focused on improving efficiency, implementing regulatory reform and capitalizing on opportunities to grow our business.”  The slow economic recovery, diminishing equity loan demand and low home equity loan rates will present a challenging operating environment, but in those challenges, we see opportunity.

Typically in summer home equity loan application levels rise as homeowners like to get access to cash for financing home improvements and vacations.   In 2010 circumstances for these once popular second mortgage programs have changed.  Home equity loan guidelines have tightened so borrowers need more equity and higher credit scores to qualify.  According to Sean Dawson a spokesman for  Smart Home Equity, ” Home values have yet to return to 2005 levels, borrowers are finding it increasingly difficult to qualify for a home equity line of credit or even a fixed rate equity loan.”  Home equity rates remain at record lows even though the volume of home equity applications has plummeted over the last few years. 

Mortgage Bankers Association reported that the overall mortgage loan application index dropped 2.9%, adjusted for seasonal factors and the July 4 holiday, and the four-week moving average increased 1.5%. The MBA’s survey covers more than half of all U.S. retail residential mortgage applications. The mortgage refinance report dropped 2.9% last week from a week earlier as its gauge for home buying applications fell 3.1%.

Mortgage rates on 30-year fixed-rate home loans averaged 4.69%, up from 4.68%, while the average for 15-year fixed-rate mortgages rose to 4.12% from 4.11%. The one-year ARM average was unchanged at 7.2%. Adjustable-rate mortgages made up 5.5% of activity last week, rising from 5.4% a week earlier.

The mortgage industry was starting to enjoy the rising demand of loan applications as mortgage refinancing activity had seen a nice streak for rising refinance applications. The Mortgage Bankers Association yesterday released its Weekly mortgage application survey for the week ending June 4, 2010. The MBA application survey covers over 50% of all US residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts.  Economists will continue considering this new data as consumer demand for mortgage loans.  In an era for low mortgage rates, a trend of increasing refinance loan applications implies consumers are seeking out a lower monthly payment which can increase disposable income and consumer spending. The home loan applications continue their declining trend indicating falling interest in home buying.  This is not good news for the housing or mortgage industry.

The Market Composite Index, a measure of mortgage loan application volume, dropped12.2% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 21.1% compared with the previous week. The four week moving average for the seasonally adjusted Market Index is down 0.7%.    The Refinance Index fell 14.3% from the previous week. The four week moving average is up 3.6% for the Refinance Index. The mortgage refinancing activity decreased to 72.2% of total home loan applications from 73.8% the previous week. This is the first drop for home refinancing activity in five weeks.   Also read related article > Credit Problems Hindering Mortgage Refinancing

It was another volatile day for the stock market so mortgage and home equity interest rates were all over the map. The interest rates went up and down like a roller coaster for most of the day. The market madness caused most home equity lenders to reprice for the worse, but later in the day, it allowed lenders to reprice with low rate reductions. All in all home mortgage rates are modestly improved again today.

Dear Smart Home Equity: We currently have home equity credit line with an interest rate prime plus 1.5 %. The equity line payment is small because it’s interest only, but I’m concerned that the rate will start rising and I might not qualify for an equity loan refinance, because I’m self-employed.  I may be doing some home remodeling.  Do you recommend another home equity line?  What do you anticipate home equity rates will go up to and can I still get a stated income home equity loan if I wanted to refinance the HELOC now?   
– Michael Sanchez

Thanks for your interest Michael in Smart Home Equity
As reported in the Wall Street Journal, the prime interest rate is at 3% above the targeted federal funds rate. Currently the targeted federal funds rate between 0 and 0.25% the prime rate is 3.25%.  We know the prime rate for home equity credit lines are not going to drop any more. Most mortgage insiders believe that the Federal Reserve is in no hurry to raise the targeted federal funds rate. If you are planning some home improvement projects, Ask your lender if they offer a No Cost Home Equity Credit Lines

You are wise to watch the home equity rates, because your credit line has an adjustable interest rates that  will only get higher. As far as qualifying for a no income documentation home equity loan that might be a problem.  There is nothing wrong with being self-employed, but most lenders will want you to document your income. To my knowledge, the stated income and no income home equity loans have not been available since last year when the “credit crunch” devoured the financial markets last year.  You might have more luck qualifying for a mortgage refinance that pays off your home equity loan.  There are still a few limited documentation refinance loans from a few lenders.  Your credit scores will need to be good and you need to be below 95% loan to value to qualify.  –Smart Home Equity

Thousands of homeowners have benefitted from consolidating debt with our home equity loans.  As the government cracks down on subprime mortgage lending it is inevitable that home equity loan guidelines will tighten for cash out and debt consolidation loans.  Consider these three steps below before taking out an equity loan to consolidate debt.

1. Determine how much unsecured credit card debt you have accumulated. Request a copy of your credit report from one of the main credit reporting agencies. You could also access it online via an online credit monitoring company like Experian or MyFICO.

2. Do you qualify to consolidate debt with a home equity loan? Contact a few different debt consolidation agencies. Review their qualification requirements. In most cases, you need to own your own home to qualify for a debt consolidation loan. Debt consolidation is a home equity loan and thus makes your mortgage payment larger. Other qualifications may include a minimum FICO score, steady employment, and a minimum monthly income.

3. How much you will save with an equity loan that consolidates your debt rather than simply making the minimum payment on your credit card debt. Always ask the mortgage company to give you a free quote.

Needless to say, the home equity sector of the mortgage industry has had three poor consecutive years.  With the credit crunch nearly killing all home equity loan programs across the nation, it was difficult for homeowners to access cash with a home equity line of credit or a closed end second mortgage.  2010 is showing signs of the home equity industry improving and 2011 looks bright.  With home remodeling inquiries rapidly increasing, it appears that home improvement loans will be making a strong rebound in the near future.

Declaring that the decline in remodeling activity may be reaching an end, the National Association of Homebuilders (NAHB) released the results of its Remodeling Market Index (RMI) for the first quarter of 2010.  The three part index measures remodelers’ perceptions of market demand for current and future residential remodeling projects.  Any result below 50% indicates that more respondents feel that the market is getting worse than indicate it is improving.   

The home improvement data is collected and reported to include impressions of both the current and impending market and NAHB has created a new unified index combining the two perceptions.  The first segment of the index measuring current market conditions jumped to 47% from 36.4% in the 4^th quarter of 2009.  The index of remodeler perceptions of future conditions had an even greater improvement, rising to 48.9% from 31.4%.  The unified measure was up from 33.9% in the previous quarter to 47.9%

The RMI has been consistently below 50% since the fourth quarter of 2005 and dipped into the low 20s in the fourth quarter of 2008.  This is the best showing for the index since Quarter 1 of 2006. “Although the overall RMI and most of its components are still slightly below the break-even point of 50, the recent improvements suggest that the remodeling market may soon reach its bottom and begin to grow in the coming months,” said NAHB Chief Economist David Crowe. “However, professional remodelers are still operating in a highly competitive marketplace and dealing with consumers who are uncertain about the future.”

Summary indices for future market indicators swelled substantially with calls for bids jumping to 56.3% (from 37.5% in 4th quarter 2009)) and appointments for proposals rising to 59.2% (from 34.4). The amount of work committed for the next three months expanded to 33% (from 21.9%) and the backlog of remodeling jobs also strengthened to 47.2% (from 31.9).

Builder expectations for major additions increased to 53.8 from 40.0 and for minor additions to 49.6% from 40.7%.  Perceptions of current and future work on maintenance and repair grew to 36.6% from 27.1%. The index of current conditions improved in three regions; only the West showed a continued deterioration in builders’ perceptions, dipping to 36.6% from 41.7%.  In the Northeast the current condition index had a huge increase from 27.7% in the 4thquarter to 45.8%. The index increased from 37.5% to 37% in the Midwest and 40% to 49.0% in the South. 

For over two years home values plummeted to 2002 levels as most Americans lost their home equity. The Federal Reserve took significant measures in 2009 to restore the housing sector with historic low mortgage rates that spurred mortgage refinance activity once again.  Now, housing markets within the country are showing the first signs of stabilizing.  The Home Affordable Refinance Program is helping stabilize the housing sector because this government loan is extending refinance loans up to 125% loan to value.  So borrowers with no equity still may qualify for a fixed rate refinance if they have a Fannie Mae or Freddie Mac mortgage. 

According to the latest results from the Standard & Poor’s Case-Shiller Home Price Indexes, which were released last week, 19 of the 20 metropolitan areas show an improvement in their annual rate of return, and 17 of the 20 metropolitan areas saw price increases in August over July. In September, existing-home sales increased to 5.57 million units, up 9.4% from August, according to the National Association of Realtors.  “We’ve already seen immediate signs of a housing recovery,” says Ross DeVol, the director of regional economics at the Milken Institute, an independent economic think tank that tracks the housing market. “But things were so depressed that coming off a low bottom could take a long time.”

Helping to speed up the housing recovery are national policies including the first-time home buyer’s tax credit and relatively low mortgage rates. Should the tax credit get extended Senate Democrats reached a compromise last week and it will continue boosting home sales, says Mark Zandi, the chief economist at Moody’s Economy.com.  Meanwhile, the Federal Reserve, which has been keeping mortgage rates artificially low, is scheduled to end that effort by March, which could temporarily increase demand for homes between now and then.  Of course, each housing market is regional and varies greatly from the other. Still, there are indicators home owners can rely on to see whether their home values are about to rise. Here are six.

The Unemployment Rate

It’s quite simple: Without a job, you can’t buy a home.  And as the unemployment rate rises, fewer individuals are capable of buying a home and qualifying for a home loan with the tightened credit standards. That decreases the demand for homes, which drives prices down.   To find a city’s unemployment rate, and whether it’s rising or falling, visit the Bureau of Labor Statistics’ web site. The most recent report, from Oct. 28, breaks down the unemployment rates in each state’s major metropolitan areas and compares those numbers to the previous year.  Also, see if local businesses are hiring and if large corporations are moving into the area. More jobs leads to more employees who end up increasing demand for real estate in the area.

Rising incomes

House hunters who want to dig a little deeper can look at the average or median change in income among households in a particular neighborhood. At a minimum, confirm that incomes are being adjusted for inflation.  Homeowners who have stagnant or decreasing salaries may not have much cash left over after they pay their mortgage; as a result, they might not maintain their homes or stay on top of repairs, which could lower a home’s value and even its neighboring homes’ values, says Zandi.

The Bureau of Economic Analysis  offers some insight on personal income. Click here and choose “Per capita personal income” and “All Metropolitan Areas” to see how an area’s personal income compares to others and to previous years. A big drawback is that the data released this year ends with 2007 figures. For state data, click here; the numbers are more current and show changes in personal income on a quarterly basis.  

The use of second mortgage liens grew during the housing boom as homeowners extended themselves with home equity loans to consolidate debt and finance as much as 100% of the original purchase price. Administration officials estimate that modifying home equity loans could help as many as 1.5 million homeowners.  An Obama official said that “by bringing the 1st and 2nd lien together, we can reduce monthly payments for borrowers and make it more likely they can stay in their houses.”

Twelve mortgage servicers, covering more than 75% of mortgages, have signed contracts to participate in the first mortgage program, government officials say. Some of them also expressed support for the home equity loan program. Kevin Moss, executive vice president of Wells Fargo Home Equity Group said the new loan modification guidelines balance “the needs of all shareholders, the borrowers, the investor and the loan servicing companies nationally.” Laurie Goodman, a senior managing director with Amherst Securities Group said the latest announcement “certainly goes a long way towards alleviating investor concerns,” said.  The latest FHA mortgage program, Hope for Homeowners “is very important,” she said. “It appears that large numbers of delinquent borrowers would qualify for this modification program for their equity loan.”

Some investors still have concerns about pending legislation that would protect mortgage servicers from lawsuits over loan modifications. “The way the investor community will be comfortable with this is if there is no servicer safe harbor,” said one investor. An administration official said that “we don’t feel like we need safe harbor for our program to be successful.”

The revised program requires mortgage servicers to determine whether a borrower is eligible for the Hope for Homeowners program and includes financial incentives to encourage the mortgage refinance loans. Many investors say they would be willing to take a principal write-down in exchange for getting troubled mortgage loans off their books. But so far, just 51 loans have been refinanced under the Hope for Homeowners program, the Department of Housing and Urban Development says. 

Last week, the Federal Reserve announced they would issuing a new proposal this week under its Truth in Lending Authority that would provide for re-designed disclosures and rule changes for closed-end first and second mortgages and home equity lines of credit (HELOCs), Fed Governor Elizabeth Duke wrote in prepared comments for her testimony scheduled this afternoon before the House Financial Services Committee.  The Fed’s proposal will also include new rules governing mortgage originator compensation, Duke said. She noted that the Fed is currently engaged in ‘discussions’ with the Department of Housing and Urban Development (HID) about using such protocol for combined Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA) disclosures.

Elsewhere in her testimony, Duke recommended that Congress ‘formally codify’ consumer protection as a core mission of the Fed, similar to monetary policy and banking supervision. ‘This would provide a clear and ongoing understanding that consumer protection matters should be viewed as an integral part of the Federal Reserve’s overall mission,’ Duke said.   She suggested that Congress could require the Fed Chairman to report periodically on the state of consumer protection in a manner similar to that of his semiannual report to Congress on monetary policy.   Duke noted that the Fed plans to conduct periodic reviews of consumer regulations and policy and will arrange for public hearings held every two years to gather information relating to consumer issues and risks. ‘As we envision this process, the Federal Reserve’s Consumer Advisory Council would assist in preparing the agenda and its members would participate in the hearings, as appropriate,’ she said.  Read the complete article online >

The Obama administration has projected that 4 million to 5 million borrowers with home loans they can’t afford would be helped. A Treasury official Tuesday said that the figure applied to those who would be eligible, not necessarily those who would participate.  Administration officials do not have an updated figure of how many people would be eligible or participate now that the criteria has been widened.  The recent rise in home loan prices has blunted the plan’s benefit, as well.

The Federal Reserve has been buying bad credit mortgage-backed securities and long-term Treasurys in an effort to lower rates.   It worked for a while. Rates hit a low of 4.84% on April 28, but are now at 5.45%, according to HSH Associates.

Since mortgage rates have been in the 6% range in recent years, refinancing to the mid-5% range may not be worth it, said Keith Gumbinger, vice president at HSH Associates. A homeowner with a $200,000 mortgage at 6% would see a savings of about $64 a month if he refinanced at 5.5%, and that’s before closing costs.  “Are interest rates for home equity loans and mortgage refinancing low enough to warrant getting into the process?” he said.  The administration’s announcement comes on the same day as an industry group reported that the demand for refinancing dropped 30% last week. In addition to higher rates, rising unemployment is contributing to the decline.

Borrowers with Freddie Mac loans who refinance through their current servicer can apply right away, but those who want to go through a different lender must wait until Oct. 1. Those with Fannie Mae mortgages can’t use a different lender and they’ll have to wait until Sept. 1 to refinance if their home loans are more than 105% of their home’s value. Unfortunately for thousands of homeowners struggling with rising home equity line rates, second mortgage liens are not eligible for this government mortgage program.

Certain lending banks are advertising 5.5% fixed, 30-year FHA mortgage rates, Quinn says, but obtaining one may be a little like trying to secure an invitation to dine with the Queen of England. Requirements: a mortgage of $417,000 or less; 20% down; a FICO score of at least 730-750 out of 850; a low debt/income ratio; a reliable income (ex-bonus) confirmed by tax returns; and a prospective home in an area where prices have stabilized. Miss one criterion, and your interest rate rises; several, and your mortgage application is likely to fail.

Fed Buys Up Mortgage Debt and Interest Rates Drop

Once you’ve been approved, Bryant also recommends locking in an interest rate for the length of time it takes the loan to close: don’t accept a verbal lock get it in writing, as rates can change as much as a quarter point or more in a single day.

Housing/Economic Analysis: Is it better to go for that low-mortgage rate now? Excluding those who have found their dream homes and can’t wait, unless home prices in your market have stabilized — i.e. they’ve risen or haven’t declined for three straight months or longer — on a total cost basis, potential home buyers would be better off waiting. Mortgage interest rates could rise, but this cost in most cases will be offset by another 10%, 20% or even larger, expected decline in median home prices in many markets  Read the rest of the article >

While most real estate evaluators would agree that Obama’s mortgage rescue plan is likely to slow foreclosures for many homeowners, some home financing experts question how much it can help in a high cost regions such as San Diego where home values have fallen so sharply. For example, the rescue plan offers much-needed refinancing to borrowers who owe more than 80 % of the value of their homes. But homeowners would be ineligible for mortgage refinancing to a lower, more affordable rate if their first loan exceeds 105 % of their home’s current market value.

Obama Outlines Mortgage Foreclosure Rescue Plan

Home refinancing would be limited to loans guaranteed by Freddie Mac and Fannie Mae, the government-controlled secondary mortgage agencies.  “How is 105 % loan-to-value going to help people who are upside down by 20% to 50 %?” said Dave McDonald, president of the San Diego chapter of the California Association of Mortgage Brokers. 

Less critical was Dustin Hobbs, spokesman for the California Mortgage Bankers Association, who lauded Obama for coming up with a flexible program that could yield some positive results. Much will depend on the implementation, he said, especially the part of the proposal that aims to provide mortgage loan modifications for borrowers in danger of default or foreclosure. Obama is proposing to have the Treasury Department partner with financial institutions to reduce mortgage payments so that borrowers pay no more than 31% of their income.  Under the new mortgage rescue plan, mortgage rates could be reduced to as little as 2%; they now stand at about 5% for thirty-year, fixed rate mortgage loans. “I would certainly hope that when they’re working on the implementation details, they’ll take into consideration that California is in a unique situation with so many borrowers in high-cost regions who are 15% or more underwater,” Hobbs said. 

FHA has attempted to stem the foreclosure crisis with their Hope for Homeowners program that was designed to reward lenders who write-down mortgages to 90% for borrowers with negative home equity and delinquent mortgage payments.  CFB mortgage advisor, Jeff Moran said, “Hope for Homeowners looks great on paper, but the FHA mortgage lenders have not wanted to touch them.”

Obama pointed out that aid will not be available to speculators or “flippers,” nor will it help people who purchased houses they knew they could not afford. “We are always delighted to see more options and tools available to troubled homeowners,” said Melinda Opperman, vice president of community outreach for Springboard, a nonprofit counseling agency. “Some individuals, though, may find there may not be a solution or option to prevent foreclosure. But in working with their lender or counselor, they can prepare for a new location for their family.”

Part of the strength of the Obama plan is creating clear loan modification standards, said Mark Goldman, a real estate instructor at San Diego State University. “So many of the programs that were supposed to help last year have really done nothing,” he said. “Now, they’re really putting pressure on the lenders, saying you cannot keep the rapid pace of home foreclosures and clearly it’s bad for everyone involved when the foreclosure news continues to worsen.”  

Both home equity loans and home equity credit lines are second mortgages, but these home equity products do have some differences with the interest rates and terms.  First of all home equity loans are installment loans with a fixed interest rate amortized on a set term.  The monthly payment for an equity loan is the same the first payment as it is the final payment. 

Home equity lines of credit naturally have a variable interest rate.  For the draw period, the borrowers are only required to make a minimum payment of interest only, but the minimum payments do not pay back any portion of the money borrowed.  With a HELOC, borrowers will only be charged interest on the amount of money they accessed.  Remember though that the home equity lines have adjustable interest rates and in a volatile market, we recommend a fixed interest rate mortgage. Home equity rates remain low but will the record low interest rates be available forever?

What are the differences with home equity lines and home equity loans?

Most home equity lenders have mortgage guidelines that vary, like loan to value, credit scores, residual income, cash out limits, loan amount limits, etc.  Some second mortgage lenders offer equity loan programs with no lending costs and annual costs for equity lines of credit.

These days, most mortgage lenders will limit borrowers to 65% loan to value and only a few home equity lenders will allow mortgage refinancing or cash out to 90% on second mortgages.  Home equity rates continue to be closing at record lows, but guidelines have tightened significantly for 2^nd mortgage liens because of the high default ratio over the last three years.

Most lenders will limit credit lines, also known as HELOCS, to $100,000. Very few 2nd mortgage lenders will allow borrowers to take out home equity credit lines up to $250,000.  Smart Home Equity will still enable home equity lines of credit with line amounts up to $500,000 for full documentation borrowers with 720 credit scores who are under 70% combined loan to value.  We will offer home equity lines up to $150,000 with 680 credit scores and 90% combined loan to value as well.

In most cases, home equity line terms enable borrowers to choose interest only home equity or principal and interest payments monthly.  Most lenders offer draw period of ten to fifteen years where the investor allows cash to be accessed from the HELOC. After the draw period expires, the credit line converts to a traditional second mortgage that features a principal and interest amortization.  

The most popular alternative financing for cash out continue to be FHA loans and most financing experts forecast FHA mortgages to remain the leading cash out loan in 2009 because HUD still enables FHA cash out refinancing to 95% for borrowers with fair or bad credit scores.  FHA refinance loan guidelines still require full income documentation, but most traditional programs require income documentation any way.

Smart Home Equity Loans is a reliable connection for home equity loans online.  Our equity loan products range from installment 2^nd mortgages with fixed interest rates to revolving home equity credit lines that offer flexibility and quick access to tax deductible cash. Most homeowners like home equity loans because they enable the borrower to get low rate money without having to refinance their 1^st mortgage loan.  Home equity terms typically range from ten to thirty year amortization schedules.   According to home equity financing expert Bryan Dornan, “debt consolidation and home improvement financing are the two most popular reasons that consumers take out a second mortgage as a lien against their property.”

Smart Home Equity has worked hard to maintain strong relationships with the top home equity lenders in the country translate to low rate cost effective home equity loans and credit lines for you. As the credit markets tighten, consider home refinancing for cash out if you are not initially approved for an equity loan.

o    Home Equity Loans for Consolidating Debt

o    Cash Out Home Equity Lines for Emergencies

o    2^nd Mortgage Refinance with Fixed Rate

o    Home Improvement Loans

o    Credit Line Home Remodeling  

o    FHA Home Refinance Loans

In a recent article, Jeff Gelles writes about how, Mark Alexander is optimistic that his neighborhood and city’s economic prospects will improve. So when falling interest rates lured him to refinance his Southwest Center City home yesterday, he might have cashed out some of his equity, as many borrowers did through much of the long housing boom.   But Alexander took a more conservative tack. He and his wife, Sarah Biemiller, replaced their 6.5 % interest rate with a 5.125 % thirty-year mortgages with fixed rate. Even after rolling in closing costs, they’ll save more than $300 a month.

Homeowners such as Alexander, a manager at the Center City District, illustrate the limits facing policymakers hoping to boost the economy by pushing down mortgage rates: Borrowers who have learned from the deflation of the housing bubble are reluctant to again start spending equity – the kind of spending that long helped fuel the broader economy. The Federal Reserve has gotten at least some of the traction it wanted when it announced plans a month ago to reinvigorate the housing market.

Interest rates for home equity loans and mortgage refinancing remain low.  Just last week, Freddie Mac said that homeowners paid an average of 5.19 % for a 30-year fixed-rate mortgage – the lowest since the government-backed corporation started its survey in 1971.  Mortgage loan activity is rising. The Mortgage Bankers Association said that for the week ended Dec. 12, applications were up 3 % from the previous week and up 37 % compared with a year before.  But more than three-fourths of the applications were for refinancing, more than any time in the last five years. And for the first nine months of 2008, Freddie Mac says, borrowers cashed out $99 billion in home equity through refinance loans – half of what they extracted during the same period in 2007.  At least anecdotally, cash-out refinancing has become even less popular since the Wall Street meltdown this fall.  

“People are scared,” said Eileen Marolla, the loan officer at Philadelphia Mortgage Advisors who arranged the mortgage for Alexander and Biemiller. “A couple of years ago, people were pulling cash out like crazy, and adding rooms or adding on third floors. Now the market is way more conservative than I’ve ever seen it.”  Alexander and Biemiller themselves benefited from the rising tide of home prices. In 1999, Alexander bought a house in Queen Village for less than $90,000. Three years later, after investing about $20,000 in improvements, he sold it for nearly $250,000.   But the couple paid a commensurately high price for their next house in Denver, and when they returned to Philadelphia in 2006, they bought near the market’s peak. With that in mind, taking out equity wasn’t something they considered, Alexander said.  “We know that the house value has probably dropped, so we already have lost equity,” Alexander said. “We don’t want to take more value out. We still look at our house as one of the biggest assets we have.”

It’s too soon to say whether homeowners have truly become more conservative about spending home equity. With housing prices faltering – even before the economic meltdown, prices nationally were down 20 % from their 2006 peak – there may simply be less paper wealth to spend.   “It’s hard to say whether people are actually changing their behavior,” said economist Mike Zoller of Moody’s Economy.com. “Because prices are down, there’s less equity to extract.”

But at least some economists say a change in psychology would be welcome, even if it means a wave of refinancings won’t quickly lift the economy.  Joel Naroff, chief economist at TD Bank N.A., called this year’s drop in cash-out refinancing “a fabulous trend” that could be “a necessary and critical part of the correction” the economy needs.  “Right now, the most important thing for households is to get their balance sheets back in shape,” Naroff said. “We were essentially making believe our houses were an ATM machine. Now we’re recognizing that we want to reduce our debt, not add to our debt.”  Improving his monthly balance sheet is Jed Melnick’s goal in refinancing his Wyndmoor home.

A lawyer who specializes in loan workouts, Melnick says he’s not worried about his job despite the recession. But rather than drawing on equity, he’s looking forward to saving $500 a month by replacing his 6.99 % mortgage with a 5 % loan.  “We didn’t need it right now,” Melnick said. “And if we’re learning anything from what’s happening right now, it’s that we should be careful about what we’re spending and building some equity. It seems like people have been overestimating how much they can rely on credit, and living above their means.”  Read the complete article >

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