Not long ago economists were recommending that homeowners should tap their equity to buy stocks. This is not a very good practice because if you risked your house before the dotcom crash you may have lost your home. For most everyone our home is our biggest cash reserve. It is like piggy bank and dipping into made financial sense when interest rates were at historic lows and home values were appreciating at double digit rates. This appreciation refilled the piggy bank. Now the market is soft and interest rates are up. With that being said is there any reason to dip into home equity?
Home equity lines of credit or HELOC is no longer cheap money. Rates may drop this year but recently the interest rate on this type of loan has been going up. At the avg. rate of 8.7% the interest only monthly payment on a $100,000 dollar HELOC loan is $725 vs. $387 when rates hit their lowest point almost 3 years ago.
You may end up owing more than you own. Lenders have made it possible for you to borrow 100% of your homes value. For example, during the housing boom home buyers that were stretching to afford a home financed the down payment with a HELOC. If you do this today and prices fall, your home loan could add up to more than what your home is worth. What happens if you have to sell for some reason? For starters you will have to pay a realtor 6% unless you are one yourself or a FSBO (for sale by owner). Then you will have to pay the difference out of pocket.
During the housing boom, homeowners financed luxurious upgrades with HELOC loans. Borrowers were confident that the run-up in their home’s value would outstrip the cost of upgrades. Now that appreciation has returned to normal or single digit appreciation you may not recoup everything you put into your home. You’re paying nearly 9% to make an investment that is not a sure thing.
Even though these facts are present you may want to tap your equity for the right reasons. It is simple to do and interest on any loan that is as much as $100,000 is tax deductible. If you are during renovations on a home you plan on staying in for a while or indefinitely then a HELOC loan is good. If you want to costs of high interest credit cards then again a HELOC isn’t bad.
Don’t be pressured by a lender or mortgage broker who says that waiting to take out a loan or line of credit will hinder you from borrowing as much.
Be a smart shopper. You can eliminate rate worries by locking in a fixed rate. Rates on old fashioned home equity loans are lower than what HELOC rates are today; 8.1% on average.
If you prefer the flexibility of a HELOC then take advantage of all competition among lenders. If you get HELOC payments debited from your checking account then this can lower payments by lowering the interest rate by half to a full percentage point.