By Jim Connolly
With the prime rate at an all-time low of 4%, current rates for home equity loans and lines of credit are now so advantageous that many planners are fielding questions from clients about the loans.
Rates have been so attractive that “we have been using them a lot more in the past 12 months,” says Diane Pearson, director of financial planning with Legend Financial Advisors Inc., Pittsburgh. “We absolutely recommend them.”
A spot search on the Internet on April 19 confirmed the favorable market environment.
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Assuming a scenario in which a home is worth $400,000 and the first mortgage balance is $100,000, here are some rates that turned up.
In one case, a home equity line of credit (HELOC), with an 80% loan-to-value ratio, offered a variable rate of 6.4% for loans of up to $25,000; 4% for loans of up to $75,000; and 3.75% for loans of up to $220,000. For a 90% loan-to-value ratio, a loan of up to $250,000 was fetching a rate of 5.50%.
Given the same scenario, but using a fixed rate home equity loan instead of a HELOC, an 80% loan-to-value ratio offered for loans up to $25,000 was 9%; 6.74% for loans up to $75,000; 6.25% for loans up to $220,000; and, for loans of $250,000 with a loan-to-value ratio of 90%, a rate of 7.25%.
Pearson says that the variable rate of a HELOC makes more sense if a client plans to pay back the loan in 7 rather than 10 years.
The choice between a HELOC and a home equity loan depends on whether the money is for a specific project or an ongoing need, and on the clients cash flow capabilities, Pearson adds.