You thought that your home equity line of credit was going to be there for you in case of an emergency, didn’t you?
For many home owners this spring has arrived with a surprise letter in the mail. “Dear borrower, we decided to freeze your home equity line”. Major lenders have sent these type of letters out to tens of thousands of customers. In some cases there are blanket freezes going on for certain parts of the country.
Given the drop in home prices and the tightening credit crunch many lenders have been reviewing their portfolios (read: your home loan). And when they run automated home valuations they see that they’re on the hook for potential losses.
Can they really do this?
Yes they can. In all equity lines agreements there is a standard clause that gives the lender to cancel or freeze the line in case of a drastic reduction of home value. Since the line is also the 2nd lien on your house the lender usually doesn’t get much if the house goes to foreclosure.
So what is there to do? If you think that the Automated Valuation that the lender used could be really wrong and your house hasn’t declined that much you can pay for an appraisal and send it in as proof. This doesn’t guarantee that they will unfreeze it but it can be worth a shot if you like your current line and the terms. Keep in mind an appraisal is around $300 though.
Usually the best option is to shop around for a new lender. Keep in mind though that the lending criteria has tightened quite a bit. Many major lenders don’t write home equity with a total loan-t0-value ratio of either 80 or 85% of the home’s value. Basically 80-85% is the new 90-95% who used to be the criteria a year or two ago.
Your best bet? Not the big nationals right now. It’s going to be your local small bank or credit union. Some credit unions are still writing home equity lines up to 95% of the home value (minus balance of the first mortgage).
Bad news for home borrowers and the real estate industry. Mortgage rates have gone up significantly this summer.
On Friday June 15, a home buyer was quoted between 6.75% and 7.00% with 0 points for a 30 year fixed conforming mortgage depending on the broker or lender he or she was talking to. A jumbo 30 year fixed mortgage was between 7.00% and 7.25% with 0 points. Adjustable rate mortgages were pretty much in the same range.
So what does this mean? If you’re buying or refinancing a home in California and want to borrow $500,000 you’re paying $409 more per month at 7.00% than at 5.75% which was a common rate available 2-2.5 years ago.
The pain will be quite severe for an already stretched and over-leveraged home owner in San Diego that has an adjustable rate mortgage that reset this summer.
If you’re borrowing $200,000 to buy a home in Indiana you would fork over $1,297 a month today at 6.75%. Some fortunate borrowers currently sit with 30 year fixed mortgages at 5.50% paying $1,136 a month or $161 less than the current rates. That’s a car payment.
So what to do? If you’re in the process of buying a home right now and got pre-qualified in March or April then you should get in touch with your loan officer. If you were stretching yourself back then you might need to adjust the price range you’re looking at.
For a home buyer it’s really hard to time mortgage rates. Your only bet is to make sure you get the best rate the day you’re ready to lock your rate.
Will rates go up or down? It depends on which economist or pundit you ask. But it’s not unreasonable to assume that mortgages will be in the 7.00% to 8.00% range for a while.
Does that sound high to you? In the short-term perspective it sure is.
But our collective memory is short. It’s quite possible that even your loan officer has no personal recollection of interest rates above 8%.
To add some perspective:
In June of 2000 the average 30 year fixed mortgage rate was 8.43% according to HSH Associates, a research firm located in Pompton Plains, NJ. In June of 1987 the same mortgage rate was 10.60%.
But tell that to the family that is about to refinance their adjustable rate mortgage this summer…
-Ola
