With home prices high and still rising and interest rates still low, many American homeowners are staying put and taking advantage of increased home values by tapping into their home equity.
Home equity line originations reached the highest level they’d been since 2008 in Q2 2017, according to Equifax. And cash-out refinances were also up by 6% for the quarter, Freddie Mac reported.
Are We in Another Housing Bubble?
Some fear another housing bubble, which could leave borrowers who tap too heavily into their home equity with upside down loans. That means if home prices and values drop significantly, they could owe more on their homes than they’re worth.
But according to a recent article in Realtor Magazine, lenders say they’re being more cautious now than they were during the housing crisis and they also now hold many fewer home equity lines. In fact, home equity lines held by U.S. banks totaled $387 billion in August, down by 35% from $610 billion in 2009.
Is It Smart to Use Your Home Equity?
As with any loan, there are risks. When refinancing to take out cash or taking out home equity loans, it’s important to weigh the pros, cons and other alternatives to ensure you’re making the right decision.
Typically if tapping into your home equity will save you money in the long run, by using it to consolidate higher-interest debt, for instance, it is typically considered a smart move.
Refinancing can also be the right thing to do if you have large home repairs that must be made, but can’t afford to fix, such as a collapsing roof or a failed heating system that must be replaced. It may be surprising to learn, however, that most financial experts do not recommend using home equity to make cosmetic renovations. That’s because, despite what we’re led to believe on home improvement shows, most homeowners only recoup a portion of the money they spend on renovations when they sell their homes.
Interestingly, a recent study published in the Journal of Financial Economics actually criticized Americans for not refinancing and taking advantage of lower interest rates enough, which could have saved them an estimated $5.4 billion. However, it’s one thing to borrow to get better rates and save money, and another to take out cash from your home equity, which in essence means you’re basically spending money, so do your homework before moving forward.
Lakeside Title Streamlines Real Estate Transactions
Lakeside Title Company offers title insurance and numerous title services to streamline residential and commercial transactions in Maryland, DC, Northern Virginia and Southern Pennsylvania. To learn more about our comprehensive title-related services, give us a call at 410-992-1070. We look forward to the chance to serve you!