How to use your home equity
Home values are creeping back up, and equity is making a comeback. Here's what to do with the money your home is making for you.
© Tetra Images/Photolibrary
Rising home values are fueling a return in home-equity lending, allowing consumers to remodel, consolidate debt or help pay tuition bills.
By the middle of 2012, home prices had finally gained enough ground for lenders to begin marketing these loans and lines of credit again, and for homeowners in many areas — particularly along both coasts — to have equity to borrow against. (Bing: How high are interest rates now?)
"The demand is starting to increase, particularly in the coastal markets," says Kelly Kockos, Wells Fargo senior vice president and home-equity product manager.
In the second quarter of 2013, 2.5 million residential properties returned to a state of positive equity, according to propertydata firm CoreLogic, bringing the total number of mortgaged homes with positive equity to 41.5 million. Just 7.1 million homes — or 14.5% of all residential properties with a mortgage — are underwater.
- On our blog, 'Listed': Fewer loans are underwater, but the numbers are still high
Tapping into this growing equity isn't as easy as it once was, however, and borrowers can't take out as much as they could before the housing bust, when many were using the cash to live beyond their means.
These days, says Greg McBride, senior financial analyst with Bankrate.com, most lenders won't let you borrow against every nickel of equity, like they did before the housing bust. "Lenders now require you to retain a 20% equity stake," he says.
You'll also have to document your income and ability to repay the loan, unlike in years past. And lenders, burned in the foreclosure crisis, are now requiring a full appraisal of your home.
- MSN Money: It's about to get harder to buy a home
"There are a lot of lenders that are still suffering from their previous decisions in home-equity [lending]," says Keith Gumbinger, vice president of mortgage-data firm HSH.com. When overvalued properties that had home-equity loans fell into foreclosure, those lenders recovered nothing.
Loans and lines of credit
Most lenders offer two basic home-equity products. The first is the home-equity loan, in which banks make a one-time lump sum disbursement of funds against your home equity, with a fixed rate and a fixed repayment schedule of five, 10, 15 or sometimes 20 years.
Borrowers paying a contractor for major home renovations or consumers consolidating debt or paying off a large medical bill often use this loan.
Article continues below
At the end of August, the last period for which data are available, the average rate for a home-equity loan to a borrower with good credit (FICO score of 740 or above) for 10 years or longer was 6.28%, according to HSH's survey of 370 lenders. That's an attractive rate, analysts say, especially when compared with the interest on credit cards. However, it's not as cheap — at least in today's low rate environment — as the home-equity line of credit (HELOC) that borrowers can draw down over time, using a checkbook to borrow money as needed.
This credit typically comes with a variable rate, based on the prime lending rate and a margin of one or more points. In September, the prime was at 3.25%, making these loans cheaper than traditional home-equity loans for most people. Exactly what rate you get will depend largely on your credit score and the amount of equity you have in your home, Gumbinger says. At the end of August, the average rate among 370 lenders for a HELOC to a good-quality borrower was 5.2%, according to HSH.
This lower rate has made HELOCs the most popular choice, as well as the most widely available, analysts say. These lines work well for do-it-yourselfers working on a project over time, and those who have recurring expenses, such as college tuition or even wedding expenses.
"There's a lot more flexibility around when you borrow and how you repay," McBride says. "And you're not paying interest on something you haven't used yet," he adds. As with a credit card, you can make a minimum payment when money is tight or accelerate payments as you see fit.
Lenders like them because they are less risky, Gumbinger says. For instance, they can cut off the rest of a $20,000 credit line if a borrower fails to repay the first $10,000 on time.
Securing a home-equity loan isn't nearly as easy as it was before the housing bust. In fact, today it looks a lot like applying for a first mortgage: You'll have to gather documentation of your income and assets to apply. Your home also must appraised, so lenders can know how much credit to extend to you.
5 years @ 6.8% on $10,000.00 = $11,824.00 or $1,824.00 in interest paid.
30 years @ 3.5% on $10,000.00 = $16,164.00 or $6,164.00 in interest paid.
A tax credit lowers your tax bill for dollar. A deduction shaves money off your taxable income, so the value depends on your tax bracket. If you're in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter in which bracket you are.
Read more at
Things that make you go hummmmm
This type of journalism (can this really be called that?) is horrible. It lacks any moral or responsibility to help people out. Instead it promotes a handicap of financial education. Why would one write on a step to getting further into debt. That equity loan is just that, A LOAN!. Stop encouraging debt and enlighten folks on how the house isn't an asset until it's sold. Until then, the house is a liability. The only one it's an asset to is to the bank while you are paying it off.
Asset - Revenue producing
Liability - Income draining
At least you have a roof over your head now. Start dealing with banks and you won't.
No body here under 50 understands how much more your Great grand kids will need to survive.
Leave them just a little bit. Banks won't help you do that.
Story is ALL BS. The banks always ask you what you want the loan for...? What are you going to tell them? I need a loan so I can take a trip to Mexico to get drunk off my **** and bang hokkers?
NO...the better answer is...I want to fix my kitchen so it is worth alot more money! Then when I can not pay you back you the BANK will have more to take! Plus WF? Isn't this the bank that just recently pay millions in fines for ripping-off the customers....It is!!! They come across as so together in the interview!
MEDIA BS! and what people do with hard earn money in this country a JOKE!
Take all the money they are dumb enough to give you, if you don't like the house. "walk away ASAP after you get the money".This is a golden opportunity to rip off the lenders as bad as they ripped others off back in the day.
The whole thing is another fraud in the making or is already made. The best indicator that it is a bunch of baloney is the lack of decent jobs, and the lenders chances to collect and "bundle", i.e. hopefully bundle the junk and dupe some more greedy people into buying the worthless loans.
You all have heard of how history repeats it self.
This time you do the scamming, a real opportunity like this almost never comes back.