Rebecca Oconnor asked:




Writer Dan Ackman notes in an article at http://www.forbes.com that a recent report by Goldman Sachs shows “in 2004, Americans withdrew $640 billion in equity from their homes–by selling them, taking home equity loans or by refinancing. This was twice the total of 2001, showing that cash-outs have been rising even faster than home prices, which is very fast indeed.” No doubt about it, Americans are using their equity!

The home equity process is streamlined these days as more and more consumers utilize their computers in acquiring loans. Information is limitless on the internet with websites such as http://www.about.com and search engines allowing consumers to answer their questions with a few keystrokes. Gone are the days of going from bank to bank to find the best rate and product. Loan applications now start online. There’s no time better than the present to take a closer look at how equity loans work and how to make your equity work for you.

What is a Home Equity Loan?

Equity loans are 2nd mortgages that are secured by the value of your home. Today you can get a 2nd mortgage without having to refinance your current mortgage. The amount of equity available to you is based on the loan to value ratio, which is the value of the loan against the fair market value of your home. So a loan of $65,000 on a $100,000 home has a loan to value ratio of 65 percent. The standard ratio is 80%, but some lenders have loans with a loan to value of 100% or even 125%.

There are two types of these second mortgages. You can either get a home equity line of credit (HELOC) or a home equity loan. An HELC works much like a credit card. It’s a revolving line of credit that can be paid off and used again. Equity lines of credit however, have a variable interest rate. Home equity loans on the other hand, involve getting all of your cash out at once and have a fixed interest rate. These work more like a standard loan.

Are Second Mortgages Right for you?

Home equity loans are considered as secure as a primary mortgage and usually the home equity rate is lower rate than credit cards and auto loans. This lower rate can make an equity loan a good choice for home improvement financing, loan consolidation and tuition expenses. The lower rate can mean monthly savings if you consolidate your debt. The interest can also be a tax deduction. Depending on your situation, this savings may make a home equity loan a good choice for you.

Home equity terms vary depending on the product. They will also depend on your credit score. Good credit will give you more options than bad credit. Home equity loans also have varying costs. There may be closing costs, appraisals, credit reports and points you will need to factor in to the cost of the loan. You should also be aware that if you refinance your existing first mortgage, the lender that holds the second mortgage must sign a subordination agreement, or the loan must be paid off with your new mortgage. The best loan for you will depend on your situation. If you know how your equity loan works, you can make sure that it works for you.

Donald

C.L. Haehl asked:




Even when you already have a first and second mortgage on your home, you may want to secure a third mortgage. You may use the cash for some value-adding feature to your home, like a swimming pool or a new kitchen may be the reason. However, securing a third mortgage is not very easy.

A third mortgage loan stands subordinate to the first and second mortgage liens that exist. For this reason, it is very difficult to find lenders offering third mortgage home loans. The risk is much greater for the lender in case of a foreclosure. If the loan does get approved, which is difficult, it would be at a much higher rate of interest as compared to the earlier mortgages.

A third mortgage is a hard equity loan. The approval usually depends on the LTV or Loan to Value and SSR or Superior mortgage to Subordinate mortgage ratio.
LTV is expressed as a percentage of the present appraised value of the house, as against the total outstanding mortgage debt(s). Lenders expect the LTV for hard equity loans in the case of first mortgages to be sixty five percent and between fifty to sixty five percent, in the case of second mortgages. For third mortgages, it is anything between fifty to sixty percent.

The SSR is calculated by dividing the amount of the superior mortgage loan amount by the amount of the subordinate mortgage and expressed as a ratio between the two. For example, if the superior mortgage were for $100000 and the subordinate mortgage for $25000, the SSR would be 4:1. For hard equity lending, the SSR is usually in the range of 1:1 – 7:1. With a low LTV and SSR, a third mortgage loan may possible.

In a foreclosure proceeding, the first mortgagee is given preference over the subordinate/subsequent mortgagees as a general rule. This means that the entire debt of the first mortgagee is first satisfied, after which any remaining amount is applied towards the debt satisfaction of the second mortgagee. If anything is left after that, only then is the third mortgage paid off.

Bill

Josh Harmatz asked:


At the end of the dot com bust, we saw money-hungry investors worldwide thirsty for more. Their new fix came via mortgage-backed securities (MBS), lots of home loans, and the proceeding hangover is still lingering.

Rise of Home Loan Lending

The influx of money into the United States from the rising economies in Asia and oil-producing countries combined with low interest rates in the U.S. contributed to good credit conditions from 2002 to 2004, which created housing and credit bubbles.

The credit conditions were so favorable that there has been a significant increase in home ownership rate—from 64 percent in 1994 to 69.2 percent in 2004. The major contributor to the increase was the rise in subprime lending, a financial term that involves financial institutions extending credits to borrowers who did not qualify for loans at the prime rate. Subprime lending caused housing prices to increase. In fact, between 1997 and 2006, the price of a typical American house increased by 124 percent.

As home ownership rate rose, so did mortgage-backed securities. MBSs are debt obligations that represent claims to cash flows from mortgage loans, most commonly on residential properties. Simply put, MBSs get their value from mortgage payments and housing prices. Because of the housing and credit booms, institutions and investors worldwide invested in the U.S. housing market.

Homeowners were refinancing their homes at lower interest rates. Taking advantage of the appreciation in housing prices, some homeowners resorted to financing consumer spending by taking out second mortgages. What can be concluded from this pattern is that consumers were borrowing and spending more yet saving less, thereby increasing household debt from $705 billion at the end of 1974 to $7.4 trillion at the end of 2000, to $14.5 trillion in the middle of 2008.

The financial system enjoyed the housing boom for a while, but not for long.

Fall of Home Loan Lending

Housing prices began declining in the middle of 2006. As a result, the same institutions and investors that invested heavily in MBS suffered significant losses. Overall, the losses suffered worldwide are estimated to be trillions of U.S. dollars.

The housing crisis is greatly affecting Americans. President Obama said that it is “unraveling homeownership, the middle class, and the American Dream itself.”

One of the causes of the decline in housing prices is that policymakers did not recognize the fact that financial institutions (such as investment banks and hedge funds) are increasingly becoming important in the financial system. These institutions were not subject to regulations that cover commercial banks. Hence, they were not able to protect themselves from MBS losses. These losses affected their ability to lend, thereby slowing economic activity.

Others proposed the following causes:

- inability of homeowners to pay their mortgage, attributed mainly to the resetting of adjustable-rate mortgages

- borrowers overextending

- predatory lending

- speculation and overbuilding during the boom period

- risky mortgage products

- high personal and corporate debt levels

- financial products that distributed and perhaps concealed the risk of mortgage default

- monetary policy

- international trade imbalances

- government regulation (or the lack thereof)

An interesting thing to note is that the predatory lending practices of mortgage brokers are cited as one of the more important causes of the crisis.

Because of this ongoing crisis, many homeowners lost their homes and investments, and homes for sale are significantly increasing.

The Future

The future of the housing market is still obscure. However, the deteriorating housing market prompted central banks around the world to cut interest rates and governments to implement economic stimulus packages to prevent any more damage to the bigger economy.

To address this crisis, some leaders in developing countries met in November 2008 and March 2009 to find solutions. As of April 2009, however, many of the root causes of the crisis had yet to be addressed. Government officials, central bankers, economists, and business executives have proposed solutions, while various agencies and regulators have taken additional steps to best handle the crisis.

President Obama and his key advisors, on the other hand, introduced a series of regulatory proposals in June 2009, but the proposals have yet to be implemented. Whether it will work or not, only time will tell.



ERNESTO