Opening a home-equity line of credit is no longer a slam dunk for three reasons.
It’s not cheap money Even though rates may drop in 2007, in recent years they’ve been going up, up, up. At today’s average rate of 8.7%, the interest-only monthly payment on a $100,000 HELOC is $725 vs. $387 when rates hit their lows nearly three years ago.
You could owe more than you own Lenders have made it possible to borrow 100% of your home’s value. During the housing boom, for instance, many buyers who were stretching to afford a home financed the down payment with a HELOC. Do that today and if prices fall, your home loans could add up to more than your house is worth. If you have to sell (and pay a realtor 6% or so), the difference will come from your wallet.
The market may not bail you out Throughout the boom, homeowners financed lavish upgrades with HELOCs, confident that the run-up in their home value would outstrip the cost of construction. Without that tailwind, you can’t be sure you’ll recoup everything you put into your home. You’re paying nearly 9% to make an investment that’s no sure thing.
Despite all of this, you may still want to tap your equity - it’s easy, and interest on as much as $100,000 in debt is typically tax deductible. Just be careful.
Make it the right reason That includes doing wise renovations, especially if you plan to stay put indefinitely, but not such extensive ones that you own the biggest house on the block.
Tags: Mortgages, Real Estate, Homes, Market Conditions
