Grabbling an equity lifeline before it floats away
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.