Home-equity loans make quiet comeback
Lenders worsened the housing bust by allowing homeowners to borrow aggressively against the rising value of their homes. Now they are gingerly testing the waters again.
Just when you resigned yourself to the idea that you'll never get that kitchen remodel you dreamed of, home equity loans are making a comeback.
Home equity loans, you'll recall -- along with home equity lines of credit, or HELOCs, were among the shovels that let homeowners dig their own graves and bury themselves in debt during the bubble. At the height of the boom, home values were rising so quickly that homeowners used the loans like ATMs, literally taking cash out of their homes.
Home equity borrowing disappeared after the housing market tanked in late 2008. Lenders concluded -- a little late, to be sure -- that helping borrowers squeeze every last dime of equity from their homes wasn't a safe banking strategy.
They sure were right about that. And anyway, they couldn't make loans on home equity we didn't have. By late last year U.S. homes had lost, on average, nearly a fifth of their value from the peak in 2007. (For the big picture at a glance, see Zillow's terrific color-coded, interactive map. The red shows homes underwater. Zoom in to see your county.)
Home equity losses were worse on the coasts, where prices had bubbled highest. By late 2011, nearly a third of U.S homes with mortgages were under water.
Now things are changing. Maybe you can get that new kitchen after all. With home values rising for 12 consecutive months, lenders are open again to home-equity lending.
Existing-home prices are up nearly 12% from a year ago, on average. That's the biggest year-over-year increase since the superheated days of 2005.
Lenders opening up
Lenders are starting to make equity loans again, especially where home values are rising. Discover Financial Services, which also offers the Discover card, announced in March that it will offer fixed-rate home-equity loans of $25,000 to $100,000, initially to current customers and eventually to others.
But you won't be able to borrow against every last cent of your equity. Lenders may be slow learners but they have noticed that their bubble-era practice of lending on 100% of a home's value left them holding the bag when those homes suddenly were worth a lot less than the loans.
So even with great credit, don't expect to borrow more than 85% of your home's value, real-estate expert Kenneth Harney says. For example, that if your home is worth $400,000 and your mortgage balance is $280,000 (70% of the value), you could borrow, at most, $60,000. That might not bankroll your dream kitchen, but should allow you to give it a nice upgrade.
Once home equity lending starts up in earnest, we'll find out if the recession really did sober us up about borrowing. Lenders are cautious now, and they're unlikely to let you get into deep trouble.
But perhaps the biggest takeaway from the crash for consumers was the realization that we can't rely on lenders to keep us out of trouble.
Stay safe by thinking through your borrowing really carefully. Shop. Don't be pressured by a salesperson, no matter how charming.
If you're unsure how it works or just want to talk over the numbers with an expert, call 800-569-4287, or find a nearby HUD-certified counseling agency on this map. And remember:
- It's not free money. This sounds obvious, so forgive us. But spending home equity is consumption, not an investment. On average, homeowners get back about 61% of each dollar spent on remodeling. That's down from nearly 87% in 2006, but up from last year's 58% return.
- Your payment can rise. Home equity lines of credit generally use adjustable interest rates. That means your minimum payment is certain to rise, since rates have nowhere to go but up.
- You could lose your home. Fall behind on your payments and the lender can foreclose. Home equity products were behind some of the worst abuses of bubble-era lending. Right now, lenders are fussy, so easy credit is not the danger. But that could change.
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