Grab­bling an equity life­line be­fore it floats away

The Dallas Morning News - - REAL ESTATE - Mar­i­lyn Kennedy Melia, CTW Fea­tures

Many own­ers are sit­ting on a fat cush­ion of home equity, de­fined as the dif­fer­ence be­tween their home’s cur­rent value and the amount of mort­gage prin­ci­pal they still owe.

That cush­ion – a record amount since the last re­ces­sion in 2009 – can be a com­fort in times like these, since own­ers can write checks against it through a “home equity line of credit.”

But if you lose a job and start miss­ing bills, it’s prob­a­bly too late to ap­ply for an equity line, since a lender won’t ap­prove one. More­over, if you have an ex­ist­ing line, “a ma­te­rial change in the credit score of the bor­rower” typ­i­cally al­lows the lender to cut your line off, ex­plained Keith Gumbinger of mort­gage data firm Hsh.com.

Even if you are one of the lucky, but want to help out an out­of­work fam­ily mem­ber pay his bills, some lenders an­nounced they weren’t tak­ing new equity line ap­pli­ca­tions at the be­gin­ning of this cur­rent down­turn.

“If you plan to use your home equity as an emer­gency fund,” said Matthew Chancey, a Tampa, Florida fi­nan­cial plan­ner, the only op­tion may be to “do a cash­out refi.”

But re­fi­nanc­ing typ­i­cally in­volves higher fees than se­cur­ing an equity line.

At the first whiff that there’s eco­nomic trou­ble ahead, “I think hav­ing ac­cess to dry pow­der al­ways makes sense,” said Leon Labrecque, Troy, Michigan fi­nan­cial plan­ner.

Equity lines carry a vari­able in­ter­est rate, mean­ing that in­ter­est charges rise when the mar­ket rises. Still, to­day’s ul­tra­low rates and steady home prices “cre­ate a per­fect op­por­tu­nity for home­own­ers with healthy and sta­ble fi­nan­cial pro­files,” said Scott Mccaskill, Fred­er­ick, Mary­land fi­nan­cial plan­ner, “to pay into their cur­rent equity or just open up a line of credit for fu­ture use.”

Own­ers can draw cash, but save it. In­deed, a re­cent Fed­eral Re­serve study finds that “hold­ings of cash and de­posit ac­counts rise” af­ter equity bor­row­ing.

Fly­ingv43/getty Images/istockphot­o

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