Why are home equity loan rates so high?
A: Welcome to the world of "junior liens," also called second mortgages. There are several reasons why these products have high interest rates.
Unlike most first mortgages which are currently sold to Fannie Mae or Freddie Mac or backed by the FHA, second liens are usually held by the mortgage lender. This means that the lender who makes the loan gets all of the risk associated with it.
Being in the second position behind the first mortgage can leave the home equity lender exposed to loss. If you should default on your loan, and the home goes through foreclosure, there may not be any money left after the first mortgage lender (holder of the primary lien) gets paid off. This has especially been the case in recent years as home prices collapsed.
So the lender who makes you a loan or line faces considerable risk and little reward. Most equity loans and lines have small loan amounts compared to the first mortgage, and are written in terms of usually 10 or 15 years. Relatively small loan amounts and relatively short repayment periods mean relatively little interest income is being made by the lender, so the interest rates charged to you must be enough to "interest" the lender to lend to you in the first place.
Even though they seem high, fixed home equity rates are actually hovering near all-time lows in the low 6 percent range. Home equity lines of credit, often governed by the Prime Rate, have been in a mostly steady, slightly declining pattern since the Prime Rate last changed back in December 2008. Present averages are in the low 5 percent range and compare favorably with the record lows of 2003-2004.
More help from HSH.com
Home price recovery index: Which metros have improved the most, least?Have home prices in your area fully recovered from the declines suffered during the Great Recession, or are they still struggling to make it back to the peak it reached before the crisis?
The salary you must earn to buy a home in 27 metrosHere’s how much salary you would need to earn in order to afford the median-priced home in your metro area.
Can I separate tax and insurance payments from my mortgage payment?It may or may not be possible for you to take on the responsibility
HSH.com on the latest move by the Federal ReserveThe Federal Reserve concluded a meeting today with no change to the federal funds rate and no changes to other monetary policy tools.
Advantages of a FHA mortgage in 2017FHA loans became more affordable in 2016, thanks to a drop in the annual mortgage insurance premium that the Federal Housing Administration charges. More cost reductions may be on the way in 2017, too.