Home Equity Loans-Why Lenders Love Them

Home equity loans are the hottest loan product in the market place today. Why is that?

Lenders have been promoting home equity loans and home equity lines of credit profusely in recent years for good reason. It is virtually impossible to watch television or listen to the radio without hearing or seeing and ad for a home equity loan. For lenders a home equity loan or home equity line of credit represents a relatively safe risk for a better return than a first mortgage home loan using the same collateral-the home.

The reason consumers love these loans so much is the rates are so much lower than credit card rates (by about 50%), which is significant, and the interest can be deductible.

In 2004 home equity loans were the fastest growing, most profitable area of consumer lending. For a home equity loan the risk of loss is less than half of that for credit card debt at 0.15%. Home equity lending increased an amazing 278% from 1999-2004 for those very reasons. Lenders love home equity loans which may in itself be a warning sign. If the borrower defaults, the lender forecloses on the property and turns around and sells it. In a positive housing market that can mean a big windfall profit for the lender.

So the reasons seem obvious. Lenders love these types of loans because they make so much money on them with relatively little risk because your home is the collateral. The chances of default are minimal. If there is a default there is potential for big upside for the lender.

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