As home prices began their long slide, banks pulled the plug on home-equity lending. Homeowners who had already snagged home-equity lines of credit lost out, too, as many received notice that their lines of credit had been frozen. Home-equity loan originations are still 80% below their peak, according to a recent report from Moody’s Analytics and Equifax. But as the housing market emerges from the doldrums, home-equity borrowing is beginning to perk up, too.
Pick your flavor. A home-equity loan, which usually comes with a fixed monthly payment and interest rate, is best for projects or purchases with a one-time, fixed cost, such as consolidating debt. Home-equity lines of credit, or HELOCs, make sense for ongoing expenses, such as long-term home-improvement projects or college-tuition payments. HELOCs usually have a variable rate that’s tied to the prime rate, plus or minus some percentage. On a fixed-rate loan, a borrower with good credit (with a FICO score of about 720 to 740) may pay 6.5%; that same borrower would likely pay the prime rate (currently 3.25%) plus 1.5 to 2 percentage points on a HELOC, says Keith Gumbinger, vice-president of HSH.com, a mortgage-information site.
Shop smart. Compare terms from several lenders, including banks with which you already have accounts or loans. Those lenders may be willing to give you a break on rates or fees, says Nessa Feddis, vice-president and senior counsel of the American Bankers Association.
Read more: T-Rex Global