Equity Unease
Thanks to appreciating home prices, many homeowners are worth more now than they were a few years ago. And, ten million of them will spend some of their housing wealth through a home equity line of credit (HELOC) by 2023, predicts a J.D. Power report.
But many owners, remembering the foreclosure crisis, will have to convince themselves that it makes sense to take on more home-related debt, says Craig Martin of J.D. Power.
Their worries, which center on taking on debt that will over-burden them, as well as the uncertain cost of a HELOC, are sensible and merit careful consideration, says Terri Munro, a certified financial planner.
With a HELOC, owners are able to draw funds over a five or ten period, up to a limit, based upon their equity, which is figured by subtracting any outstanding mortgage from the appraised value.
During the draw period, borrowers are usually only required to pay interest charges, says Keith Gumbinger of HSH.com, a mortgage data site. During the next five or ten years, both principal and interest payments kick in for payoff.
Typically pegged on the prime rate, plus a couple of percentage points, the rate charge fluctuates with every movement of prime, says Gumbinger.
Munro recommends running scenarios on what payments could be when prime jumps a couple of percentage points, since “we are in a rising rate environment.”
And, “be mindful of the amount of equity left in your home, especially if you will be relying upon that equity for a down payment on your next house,” Munro warns.
Usually, lenders will require that at least ten percent of equity is retained, says Gumbinger. (A $300,000 home with a $200,000 mortgage would have $100,000 in equity, and borrowers could tap $70,000, retaining $30,000.)
One variation of the HELOC, whereby borrowers can convert some of what they’ve borrowed into a loan with a fixed rate, is a good option for owners who worry about how long and at what cost they’ll carry equity debt, Gumbinger says.
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