Tapping Home Equity for Cash Is Back

By Steve Matthews

Tuesday, September 5th, 2017

Rising home prices are getting borrowers comfortable again with the idea of tapping their homes for cash.

Home equity lines of credit (HELOCs) and ‘cashout’ refinances, two products that let borrowers spend their equity of home ownership before selling, are back in vogue with borrowers according to a recent Wall Street Journal article. The trend reflects growing confidence and is a potential benefit to the U.S. economy as homeowners have more money to spend.

The main engine driving demand: rising home prices. The median sale price of an existing home rose to $263,800 in June, the highest on record, up 40% from $187,900 at the start of 2014, according to the National Association of Realtors.

Banks insist the increased borrowing doesn’t herald a return to housing-bubble days when borrowers came to view their homes as cash registers. Banks say they are being more cautious in how they make such loans and some add they are encouraging borrowers to tackle renovations or consolidate debt—uses that are considered investments rather than luxuries.

A HELOC is similar to a credit card, where a borrower can spend as much or as little of the available credit as they wish—but with the house as collateral. In a cashout refi, borrowers refinance an existing mortgage into a new one with a higher principal balance, putting cash in their pocket.

Low interest rates are another draw. For example, the average interest rate on a HELOC is roughly 5.5%, according to Bankrate.com. Credit cards average over 16% according to the same site.

There are risks. A cashout refi can extend the length of a mortgage and cost a borrower more in interest over the life of the loan. If home prices fall, a borrower who has tapped home equity risks that the new mortgage balance will be greater than the value of the home—a so-called ‘underwater’ scenario that caught many during the financial crisis.

Borrowers typically only pay interest on these loans for the first 10 years. In subsequent years, both principal and interest is due.

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