It was just two short years ago that several major banks stopped offering HELOCs or home equity lines of credit. Wells Fargo and JP Morgan Chase were the most notable lenders who cited an uncertain economy in the early days of the Covid-19 pandemic as the rationale for hitting the pause button on home equity loans.
Why did big banks stop financing HELOCs? The COVID-19 economy has made HELOC lenders rethink this loan option. The origination of HELOCs is just too risky in this changing economy – despite the profits and convenience involved.
During the early stages of the 2020 financial crisis, several big banks stopped offering HELOCs, citing unpredictable market conditions as the reason.
The timing behind financial considerations is a personal one but, for many homeowners, now can still be a good time to take advantage of their existing home equity. Home equity loans and HELOCs still currently have lower interest rates than many popular credit options.
If the value of your home drops significantly, your lender may decrease your HELOC limit to reflect the reduced equity or freeze your HELOC account altogether. A housing market crash may also cause you to default on your HELOC if you owe more on your home than it's worth.
Lower interest rates
While home-loan interest rates overall have risen dramatically since 2022, HELOC rates still tend to be lower than those on credit cards and personal loans. If you qualify for the best rates, a HELOC can be a less expensive way to consolidate debt or finance a home renovation.
Calculating the monthly cost for a $50,000 loan at an interest rate of 8.75%, which is the average rate for a 10-year fixed home equity loan as of September 25, 2023, the monthly payment would be $626.63. And because the rate is fixed, this monthly payment would stay the same throughout the life of the loan.
In October of 2023, Bankrate data showed rates were averaging 8.75 percent on home equity loans and 9 percent for HELOCs. There is one bright spot, though: If you use a HELOC or home equity loan for housing-related repairs or remodels, the interest can be tax-deductible. That can reduce the real cost of your financing.
One of the most intriguing ways to use a HELOC for wealth-building is to invest in income-generating assets. You can use the funds from your HELOC to invest in real estate, stocks or other income-producing investments.
Looking forward to 2024, some financial experts predict that home equity loan rates will begin to drop. "The Fed's voting members project that the Fed Funds Rate will be 50 basis points lower in 2024 and 175 basis points lower by 2025.
If you know exactly how much you need to borrow, a home equity loan can be a better option than a HELOC. Home equity loans tend to have lower interest rates than HELOCS, and the rates are usually fixed for the life of your loan.
Past Bankruptcy or Foreclosure
Having a bankruptcy or foreclosure on your short- to mid-term credit history will likely make it difficult to qualify for all types of loans, including HELOCs. These marks against your creditworthiness are not permanent, but they also don't vanish overnight.
Negotiating Fees
But you have to ask. Lenders may offer several options when it comes to locking in a fixed interest rate on your HELOC. The longer the period of time in which you get a fixed rate, the higher the interest rate will usually be.
The ability to repay is dependent on income, so it is going to be difficult to get approved for a home equity loan with low income. Having a cosigner would help your case. A cosigner is someone with good credit and high income that agrees to pay your debt in case you default on your loan.
Banks could also freeze your account and stop additional extensions of credit if there has been a "significant decline" in the property value since the HELOC was approved. Review your account agreement for policies specific to your bank and your account.
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.
3. Rental Properties. Owning a rental property could be one of the most profitable ideas for how to invest $200,000 for monthly income over the long term. You could invest your $200,000 towards the purchase of a rental property, then collect rental income for as long as you hold it.
Having a HELOC could increase your debt-to-income ratio, making it more difficult to be approved for other loans or credit.
HELOC rates are so high because the rates for home equity lines of credit change somewhat in accordance with the prime rate, which closely follows the federal funds rate that the Federal Reserve has been raising for months to try and control inflation.
The HELOC end of draw period is when you enter the repayment phase of your line of credit. You are now required to begin paying back the principal balance in addition to paying interest. At this point you may no longer access funds and you may no longer convert a variable rate to a fixed rate.
In 2023, all tracked states have seen HELOC activity decrease compared with 2022. Notably, California posted the highest approved HELOC amount, surpassing $9 billion so far in 2023.
Example 2: 20-year fixed-rate home equity loan at 8.85%
So, for a 20-year, $100,000 home equity loan, you could expect a slightly higher rate than on a 10-year term. In this case, let's say you qualified for an 8.85% rate. This would result in a monthly payment of $890 — much lower than the payment on a 10-year term.
Borrowers often wonder if they can pay off their home equity line of credit (HELOC) early. The short answer? A resounding yes, because doing so has many benefits. If you're making regular payments on your HELOC, you may be able to pay off your debt sooner, so you're paying less interest over the life of the loan.
Example 1: 10-year fixed-rate home equity loan at 9.09% interest. The average interest rate for a 10-year fixed-rate home equity loan is currently 9.09%. If you borrowed $100,000 with that rate and term, you'd pay a total of $52,596.04 in interest. Your monthly payment would be $1,271.63.