Both CBS News and Bloomberg have covered the recent resurgence in home equity borrowing in the US. Here are the encouraging words:
- Rising real-estate prices put $1.6 trillion back into homeowners' pockets last year (though some households still have underwater mortgages).
- That was the biggest jump in home equity in 65 years.
- Overall, the collective value of American homeowners' real estate assets exceeded the amount they owed on their mortgages by $8.2 trillion in 2012 -- up 25 percent over 2011.
- The number of home equity loans in serious delinquency or default (90+ days past due) fell 25 percent in the fourth quarter of 2012.
- Some lenders are starting to loosen their lending criteria, approving consumers who previously would have been declined.
So, you stand a better chance of securing a home equity loan now than you might have a couple of years ago. But -- assuming you're a responsible borrower, and you're confident you can make payments –is home equity financing the right move for you?
Home Improvements:Think Nice
Borrowing to invest in what's likely to be your biggest asset is often a smart choice. Here's why:
- You might not need to trade up to a more expensive home, saving closing costs and a whole lot of hassle.
- If you do decide to trade up anyway, you may well -- especially in this rising market --have added significantly to the value of your home by upgrading.
- At the time of writing, many contractors are still struggling to find work as the economy recovers only slowly. Haggle a bit, and you could get yourself a bargain.
- You'll be living somewhere nicer!
Not all home improvements are as effective at adding value as others. If your goal is to increase the worth of your property, much of the advice contained in 7 Most Profitable Home Renovations remains good, even though the article was written a few years ago.
Debt Consolidation? Think Twice
Debt counselors are divided about the wisdom of turning to home equity to consolidate your accounts. It may be right for you, but you need to think carefully before proceeding.
On the plus side, the best home equity loan rates are close to historic lows right now. The same can't be said for credit card rates or those for many other forms of borrowing. According to theSan Francisco Chronicle, borrowers with good credit can expect to pay up to a whopping 10 percentage points less for a fixed rate home equity loan than they might on their credit cards. That could mean slashing your annual card interest bill by as much as two-thirds.
There are two big caveats:
- If you're the sort of person who gets into financial trouble easily, can you be certain that extra credit is what you need? Are you absolutely sure you won't end up just running up your card debt again, and having to pay back that and your home equity loan?
- Should you secure debt with your home if your finances are shaky? Credit card debt is unsecured and may be dischargeable in a bankruptcy, but your home is at risk of foreclosure if you default on home equity financing. Many debt experts warn of the dangers of converting unsecured into secured borrowing.
Fixed Rate Is Less Risky
We may today have close to the best home equity loan rates ever, but few economists expect them to stay that way indefinitely. It's highly likely that, sooner or later, all interest rates are going to rise.
And, when that happens, you might be glad to have a fixed rate home equity loan. Yes, the initial rate is higher, but you are protected against rate increases and the fixed payments make budgeting easier.
It's important whenever you borrow to take the process seriously, to choose your lender carefully, and to understand the obligations in your credit agreement thoroughly. But if you're a responsible borrower, taking on appropriate, "good" debt, it's hard to beat home equity loans.