About National Home Equity Rates

A home equity loan can be the perfect answer for a person with little income and a large amount of debt. However, whether this loan is a good idea or not depends upon the rate of that loan, which can range from 3 percent to more than 8 percent, depending upon the economy, type of loan and the amount of equity one has in his home. During tough economic times, home equity rates are typically lower, which can help one weather the storm. However, during booming times the rate on that loan can be substantial, leaving a homeowner with more debt than he bargained for.

Function

Most homeowners use home equity loans to pay off other large amounts of debt such as credit cards, car payments or other significant expenditures. To calculate whether taking out a home equity loan makes good financial sense, however, one must consider the rate of such a loan and whether it will ultimately bury him under more debt or buy him some time to get back on his feet and conquer that debt.

History

Since the economic downturn, credit crunch and housing bubble burst of 2007, interest rates on most loans, including mortgages, have dropped. As of early 2009, mortgage rates have nearly dropped an entire percentage point, depending upon the type of mortgage and location. For example, a one-year adjustable-rate mortgage in Irvine, Calif., now stands at 4.247 percent, while a 15-year fixed-rate mortgage in the same city is 5.186 percent. Home equity rates have also dropped slightly. For example, in California, a HELOC has dropped 0.24 percent to 5.049 percent, while a 15-year home equity loan has only dropped 0.01 percent, to 8.280 percent.

Types

There are two types of home equity loans, which have different national rates. A standard home equity loan will allow you to take out a loan on your home that is equal to the amount of equity, or money, you have put into the home. For example, if your home appraises for $375,000 and you've paid $175,000 into your home's mortgage, then your lender may allow you to borrow that $175,000. The rate for this type of loan, which is often referred to as a second mortgage, is usually higher than the rate of your initial mortgage. The second type of loan, referred to as a home equity line of credit (HELOC), allows a homeowner to borrow up to the amount of equity he has placed in the home. He can borrow this money, or any portion of it, all at once or only when he needs it. The rate on this loan will vary, depending upon whether the entire amount is borrowed at once or over a period of time.

Time Frame

Most home equity loans have a 15-year time limit. To avoid having to pay this entire amount back at once, most homeowners will begin paying the loan back right away. If they do not have cash on hand, some homeowners will opt to pay one large lump sum at the end of the loan's term, which can lower their monthly payments. HELOCs are usually held for a longer period of time, usually 30 years.

Considerations

Home equity loans can be tax-deductible if they are used to make improvements to the home with the hope of increasing its value. Check with your accountant, however, to be sure that your repairs and improvements will qualify as deductions.

Resources

• The Basics of Home Equity Loans
• California Mortgage Rate Trends and Analysis