Wells Fargo, one of the largest home lenders in the US, said it it stepping away from the market for home equity lines of credit because of uncertainty tied to the coronavirus pandemic.
Half of U.S. metro areas with the highest volume of home equity lending in 2024 are in California. Home equity grew significantly over the last couple of years, and owners with substantial equity may prefer to keep their existing low rates, thus choosing home equity loans and HELOCs over cash-out refinances.
A lender has several reasons for freezing or reducing a customer's HELOC, including diminished market value and suspected inability to repay the loan. Don't despair if your HELOC is frozen; there are several options available to get it reinstated.
An equity loan is a term or closed-end loan, meaning you get all your money up front and make fixed payments over a set amount of time, with a fixed interest rate. Once you get the money, you cannot borrow further from the loan. An equity line (HELOC) is an open-ended line of credit.
Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $50,000 HELOC at today's rates would be about $372 for an interest-only payment, or $448 for a principle-and-interest payment.
Home Equity Loan Disadvantages
Your Home Will Be Used As Collateral: Failure to make on-time monthly payments will hurt your credit score. If you default on the loan, the lender can take possession of the home through a foreclosure.
Key Takeaways
HELOCs usually have two stages: a draw period and a repayment period. If your home value drops significantly, your lender might limit or freeze your credit line.
Why Is Wells Fargo No Longer Accepting New HELOC Applications? This move is in line with a larger trend among banks to tighten credit in response to the coronavirus pandemic, which has created increasing economic uncertainty and financial hardship.
On the downside, HELOCs have variable interest rates, so your repayments will increase if rates rise. Another risk: A HELOC uses your home as collateral, so if you don't repay what you borrow, the lender could foreclose on it.
Interest rates are already lower than many alternatives
If you need money now, then this is likely your best option. That's because interest rates on home equity loans, averaging around 8.40% right now, are already much lower than some popular alternatives.
Higher Interest Rates:
In general, home equity loans often come with higher interest rates compared to primary mortgages or other types of secured loans. One reason for this is that home equity loans are often in the second lien position, meaning they are subordinate to the primary mortgage.
Homeowners typically need a combined loan-to-value, or CLTV, of at least 80% to qualify for a home equity loan. This means a maximum of 80% of your home is financed, and you have at least 20% equity in the home to borrow from. Having strong credit and a low debt-to-income ratio can also help you get approved.
A home equity loan risks your home and erodes your net worth. Don't take out a home equity loan to consolidate debt without addressing the behavior that created the debt. Don't use home equity to fund a lifestyle your income doesn't support. Don't take out a home equity loan to pay for college or buy a car.
Home equity loans use your home as collateral. You could lose your home if you can't keep up with your loan payments. Home equity loans should only be used to add to your home's value. If you've tapped too much equity and your home's value plummets, you could go underwater and be unable to move or sell your home.
Early in the pandemic, several big banks stopped offering HELOCs, citing unpredictable market conditions. Demand for these loans is low, but a few big banks have started offering them again. Plenty of lenders still offer both products, though, so you shouldn't have trouble getting either.
Just as with any other loan, home equity lenders will analyze your credit score and credit history when you apply for a home equity loan. Those who apply with lower credit scores will have a harder time getting approved. And, that's especially true for those with credit scores below 620 or so.
The average home equity loan interest rate (as of January 8, 2025) is 8.43% and slightly higher for different repayment periods (8.55% for a 10-year one and 8.49% for a 15-year repayment period).
Key Takeaways
In a true financial emergency, a HELOC can provide lower-interest cash than other sources, such as credit cards and personal loans. Using a HELOC to fund a vacation, buy a car, pay off credit card debt, pay for college, or invest in real estate is not a good idea.
Yes, having a HELOC or home equity loan on your home does not usually complicate the home sale process. When you sell your home, proceeds from the sale will be used to cover the outstanding balance on your primary mortgage, HELOC or home loan, and any other liens on the property.
Your personal debt load, income and credit score will also help determine your loan amount and interest rate. But remember: The stakes are higher with a home equity loan because it's secured by your home. If you can't make your payments, the lender could foreclose on your house.
By paying off your HELOC years ahead of time, you can avoid paying a significant amount of interest. Often, the interest you avoid paying is far more than the penalty you incur for early termination.
Your home will be used as collateral and a Deed of Trust will be recorded. This means that if you don't pay back your loan, the lender can sell your home. If you want the home equity credit line removed from your property title, you must first pay back the money you borrowed.