Should you take out a home equity loan when the housing market is slowing down?

The housing market is slowing in many areas of the country -- a development that could influence the value of your home. This slowdown can come into play if you’re considering getting a home equity loan.

Home equity loans are generally considered “smart debt.” The interest rates are lower than they are for most other kinds of consumer credit, and the interest may be tax-deductible as well. But if you borrow the maximum amount and a soft housing market significantly reduces the value of your home, you could end up owing more than your home is worth.

So “caution” is the word of the day if you’re considering taking out a home equity loan during a slow housing market.

A housing market on the decline could tip the scales in favor of a fixed-rate home equity loan rather than a home equity line of credit, which generally has a variable rate. The variable rate will rise with other factors such as the prime rate, which will increase the cost of your credit over time. And, with a loan rather than a line of credit, you won’t be tempted to keep tapping into that credit and possibly get in over your head.

Being conservative in taking out any loans -- using the money for safe investments such as home renovations or your children’s college education -- becomes even more important when the housing market is slowing.

A slow housing market is not a good time to borrow more than 75 percent to 80 percent of your home’s equity (its appraised value minus what you owe on your mortgage). A high loan-to-value ratio puts you at more risk if a job transfer or other personal situation forces you to sell the house: in a slower housing market, you might not get a high enough price to pay off both the mortgage and the home equity loan.

However, if you are conservative and cautious in your approach, a home equity loan will continue to be “smart debt” even if the housing market is slowing.

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