Home equity loans are becoming tougher to find
Home equity loans are becoming tougher to find

Since buying her home in the Village seven years ago, Leslie Spears has been itching to update her late '70s kitchen, with its laminated counters and inefficient cabinets. Some $20,000 later and one summer of inconvenience, she has a new kitchen — minus a backsplash that's expected to arrive any day.

Spears and her mortgage company agreed in May to hold off on a home equity loan until after the remodel — when her house should appraise for more and she'll qualify for a bigger loan. She put her expenses on a Lowe's credit card, which has zero interest for six months. In December, the rate kicks up to 17 percent.

"I'm sweating it a little,” Spears said. "Several homes for sale in my neighborhood aren't moving quickly,” she said. "I'm checking comps (comparable sales) all the time, in hopes of getting as high a value on my home as possible.”

Though home equity loans and home equity lines of credit (HELOCs) still are available on owner-occupied properties held for at least 12 months, local lenders say the last several months they've not been making as many of the loans, which typically carry an adjustable rate, where payments change with the changing interest rate. Thursday, the average rate nationwide was 6.98 percent on a $30,000 line of credit and 7.99 percent on a $30,000 home equity loan; 7.12 percent and 8.26 percent, respectively, the week before, according to Bankrate.com.

"Home equity loans are more difficult to find now,” said Trey Bowden, senior mortgage professional at Aduddel Mortgage Group in Edmond. "There have been too many defaults and foreclosures. Lenders don't want to be in that more risky second position.”

Moreover, the loans are hard to get for borrowers whose credit scores are less than 700, Bowden said. The national average is 680.

"There's no question, the rate on second mortgages have increased in the last six months, as credit has tightened,” said David Feisal, senior vice president of Spirit Bank and immediate past president of the Oklahoma Mortgage Bankers Association. Still, the loans remain a valid way to pay for home improvements, consolidate debts, buy a car or make other purchases, Feisal said.

"Home equity loans can be a way of turning non-deductible personal interest, paid on a car loan or credit cards, into deductible interest,” Edmond certified public accountant Mike Bell said. With certain criteria met, the interest paid on home equity loans qualifies as an itemized deduction.

"But the loans can be dangerous,” Bell said. "Often the lure of easy money borrowed against your home equity causes people to borrow more than they can afford, or worse, to delay dealing with a financial problem,” he said. "Home equity loans can free up credit cards, which, in a few months or year, become maxed out again, leaving the individual with a home equity loan plus credit card debt.”

A study recently released by the Census Bureau underscores Bell's concerns. From 1991 to 2001, the number of home equity loans more than doubled, jumping from 3.4 million to 7.7 million. Of the latter, 6.2 million were junior, or second, mortgages.

Of 70,000 residential property owners polled, most still took out the loans to make home additions or improvements. But that reason fell from 54 percent in 1991 to 45 percent in 2001, while the second most popular reason — debt consolidation — rose from 21 percent to 26 percent over the same period. Other reasons included to buy a car, 9 percent, down from 10 percent; and education or medical reasons, 4 percent, down from 6 percent.

"More homeowners clearly are using home equity loans for debt consolidation vs. home improvements,” said study author Linda Cavanaugh. "Of course, I can't say for sure, but I think that number will be even bigger in 2011, the year of the next study.”

Census researchers found homeowners in the South and Midwest account for more than 59 percent of home equity borrowers, with 29 percent each. Those whose loans are second mortgages have lived in their homes a median of three years and have a median household income of $72,900.

Traditionally, there are fewer home equity loans when interest rates fall, said Howard Savage, supervising economist for the Census Bureau in Washington, D.C. and native Oklahoman. Buyers, Savage said, simply refinance to take cash against their equity in their home. When interest rates rise, home equity loans rise.

Homeowners, Bell said, should be sure to compare the after-tax cost of the interest of home equity loans with the cost of non-deductible loans, which usually carry lower interest rates and may be cheaper in the long run.

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