Skyrocketing real estate values mean many homeowners are flooded with fairness. The average home price has risen 42% since the start of the pandemic, and the average homeowner with a mortgage now has more than $207,000 in stock, according to Black Knight, a mortgage and real estate data analytics firm. can be used.
It is tempting to use that wealth. Proceeds from a home equity loan or line of credit can fund anything the borrower wants: home improvement, college tuition, debt consolidation, a new car, vacations, and more.
But of course, just because you can do something doesn’t mean you should do it. One of the risks of such borrowing should be very obvious. That means you are putting your home at risk. If you can’t pay, the lender can foreclose and evict you from your home.
And as we learned during the Great Recession of 2008-2009, house prices can go up or down. According to his 2011 report in CoreLogic, borrowers who leveraged their home equity are more likely to be “water-starved” than those who don’t have a loan or line of credit, meaning they have more money than they’re worth. He was likely in debt. Real estate data company.
Other risks are less obvious, but worth considering.
Stock may be needed later
Many Americans don’t save enough for retirement and may need to use their home equity to avoid a precipitous drop in living standards. Some do it by freeing up funds to supplement investments and other retirement income.
Other retirees may resort to reverse mortgages. The most common type of reverse mortgage allows homeowners over the age of 62 to convert their home equity into cash, a series of monthly payments, or a line of credit that they can use as needed. The borrower doesn’t have to repay the loan while living in the house, but if the borrower dies, sells, or moves, the remaining portion must be repaid.
Another potential use for home equity is paying for nursing homes and other long-term care. A semi-private nursing home cost him an average of $7,908 a month in 2021, according to Genworth, which provides long-term care insurance. Some people who do not have long-term care insurance plan to pay those bills by borrowing the property against the mortgage instead.
Clearly, the more you owe a home, the less assets you have for other uses. In fact, having a large mortgage may prevent Reverse from getting his mortgage at all. To qualify, you must either outright own your home or have a significant amount of equity capital (at least 50% and sometimes more).
you are in deep debt
Using home equity to pay off debt with much higher interest rates, such as credit cards, may seem like a smart move. Interest rates tend to be.
However, if you do file for bankruptcy, unsecured debt such as credit cards, personal loans, and medical bills are usually erased. Debt secured by the home, such as mortgages and home equity borrowings, are typically not.
Before using home equity to consolidate other debts, consider talking to a nonprofit credit counseling agency or bankruptcy attorney about your options.
What You’re Buying Won’t Outlast Your Debt
We rarely, if ever, borrow money for pure consumption such as vacations or electronics. Ideally, you should borrow money only for purchases that increase your wealth. For example, a mortgage to buy a house that appreciates, or a student loan that provides a higher lifetime income.
If you plan to borrow home equity to pay for something that won’t add value, at least be careful not to make payments long after its useful life has passed. If you use home equity to buy a vehicle, consider limiting the loan term to 5 years so you don’t incur large repair bills while paying off the loan.
Home equity loans typically have fixed interest rates and fixed repayment terms of 5 to 30 years. A typical home equity line of credit, on the other hand, has a floating rate and a 30-year term. This means that you can borrow money with a 10-year “draw” period, followed by a 20-year repayment period. Normally, you only have to pay interest on the debt during the withdrawal period.
This brings us to our final piece of advice. Due to rising interest rates, only consider using HELOC if you can pay off your balance fairly quickly. If it will take years to pay off what you borrowed, getting a fixed interest rate on a home equity loan may be a better way to access equity now.
By LIZ WESTON of NerdWallet.