Here’s Why It Might Get Easier To Get a Home Equity Loan

By: Anneken Tappe · May 06, 2024 · Reading Time: 3 minutes

Enter Freddie

There is some big news in the world of mortgages: Freddie Mac wants to put cash into homeowner’s pockets.

The Federal Home Loan Mortgage Company, a government-sponsored finance company also known as Freddie Mac, wants to enter the secondary mortgage market. A secondary home loan is also known as a home equity loan, and offers a way for homeowners to access the value of their homes.

If approved, this proposal could theoretically stimulate the U.S. economy without adding to the government’s deficit.

Breaking It Down

Freddie Mac filed a proposal for its new venture last month. If approved, it could make as much as $1 trillion available for homeowners. The secondary mortgage market has shrunk in the years following the financial crisis, as many major lenders cut down on that part of their businesses. But with high inflation and home prices weighing on American households, the option of additional access to credit is compelling.

While Freddie Mac doesn’t directly lend to consumers. Instead, it buys outstanding home loans from approved institutions, adding both liquidity and stability to the home loan market, and allowing lenders to lend more.

Now, Freddie is looking to do the same thing in the secondary mortgage market. There will be some limitations, such as that the combined loan-to-value ratio of the two mortgages doesn’t exceed 80% of the property value, for example.

There are several types of home equity loans, but they all enable homeowners to borrow against the paid-off portion of their homes in order to access cash. By extending its mortgage-backed securities services to the secondary market, Freddie Mac could encourage more lenders to offer these loans, which could bring down costs for borrowers.

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