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Because in recent years there has been a rapid growth in mortgage rates in addition to historic home price valuation at record levels, Many homeowners see applying for a home equity line of credit as an option, either to pay off debt or finance home improvements.
According to a survey conducted by MeridianLink, a 48% of those surveyed stated that they were not very clear about the procedure of loans with mortgage guarantee while, a 13% of that same sample confirmed that they did not understand the financing mechanism at all.
But what is a home equity loan and why are homeowners in the United States increasingly turning to this method? In general terms, It is a request for money that is made to a banking institution in exchange for a property, which would function as a guarantee for the payment of that credit; If you do not pay the loan, the bank can keep the property.
Fortera Credit Union Vice President of Consumer Lending Tim Wheeler noted that “for established homeowners with good credit, home equity loans can be a safe and predictable way toand to live well based on the equity it has built and earned to date,” he said.
Nevertheless, many lending banks have now tightened their criteria to access mortgage loans and the reason for these decisions is that some of them fear an economic slowdown. Even though the Federal Reserve is making the possible maneuvers to bring inflation to 2% With interest rates rising, concern about a looming recession looms large.
For the president and director of loans of Approved Funding, Shmuel Shayowitz, the suspicion of some lenders is logical. “Usually, a loan will have a fixed rate, while a HELOC (home equity line of loan) will have a variable rate linked to the prime rate,” he explained. Therefore, if the Fed raises the fed funds rate, prime rates will be affected by the increasehe mentioned.
It also recommended that owners clearly identify the purpose of the funds and early repaymentin this way it will be possible to identify which is the best option: a fixed-rate home equity loan or a line of credit, Shayowitz said.
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