Pre-2009? Absolutely. At least once a week I was getting something in the mail from a random lending establishment promising me fame and fortune* by letting them dip into my home “equity”. The two largest bullet points for the action were debt consolidation and home renovation.
Now? Not so much.
My wife was trying to talk me into it regardless of the fact that we had little debt outside the mortgage itself, and no reason to renovate. :mad:
Is it a good idea?
A lot depends upon how much you owe on your primary mortgage, how much equity you have, and what you are going to do with the money.
Taking out a HELOC to just spend your equity is stupid. When I took over the old family house it was in need of great repair and the primary mortgage was very small, under 30k. We had quite a bit of equity, mainly in the property.
My wife and I took out a HELOC for about half of what the bank was offering, and we gutted the interior, sheet rock, paint, carpet, new heat, and put a much needed roof on the place. I also built a stand alone shop for my car nut habit.
The end result was a way to bring the old home up to modern standards for a reasonable interest rate, 4.5%. Now the first mortgage is almost gone and our monthly bill is less than $600. You cannot rent an apartment anywhere for that, well, almost anywhere.
A HELOC can be a good move to make, provided that you return the money into your primary investment, your home, because it will increase the future equity of the property.
Spending the equity on non-home related things, like your kid’s college is just a really bad idea. Then if hard times come, as they so often can, you have no reserve. And as you age you may need to take that equity and downsize your lifestyle.
We all should have learned in 2008, that equity is dependent upon the market and can vanish in a bad week of the market. Poof!
Regarding taking equity loans out and using your house as collateral, can you not just get loans without using your house as collateral? As I mentioned in a different thread, we have a line of credit that we can use for things like debt consolidation and renovations, and it isn’t backed by any collateral at all. I feel like I’m missing a piece of the puzzle here - why not get loans that aren’t out of your home equity?
Insurance doesn’t cover everything. In some cases, you need to pay up front for emergency repairs then get reimbursed by the insurer later.
Around here (Ireland), during the property bubble of around 1997-2007, there were loads of bank ads encouraging parents to take out home equity loans in order to give their adult kids the deposit for their first homes, since there was no way the kids would ever be able to save as fast as house prices were increasing.
The property bubble did not end well.
In general, you get significantly lower interest rates with a secured loan, instead of an unsecured loan, for the simple reason that the bank can take away your house or car or whatever if you default.
Before the crash there was a barrage of ads on the radio for home equity loans. They mentioned the money you could get, and mostly talked about paying credit card debt or vacations, seldom reasonable stuff like home improvements which would increase the value of the house. Then nothing. Now they are back.
The ads of course never mention cash flow - you might get the money, but your monthly payments are going to increase.
Refinancing without increasing the amount of debt is quite another thing. When rates were dropping you could even take out some money while still reducing monthly payments. But people in general don’t seem to get cashflow.
Seriously? People were that stupid? And banks encouraged it?:eek: Wow. :smack:
I know the question was for the USA but we borrow against the equity in Australia too. I’d paid a large chunk of my mortgage, went back to the bank and refinanced the loan to get a chunk of cash that I used to extend the house. Repayments stayed the same, value of the property increased, more comfortable living arrangements, win win.
I recommended it to my mom but only for very specific reasons:
It worked great for her. She was able to relax about the bills. They got the HELOC paid off in under 18 months, and when the housing bubble burst, they lost a chunk of equity but still had more than they started with. It’s since recovered and then some.
You may be confusing terms. A home equity loan provides a line of credit secured by a mortgage (first, second, third…) as opposed to an unsecured line of credit (like a credit card).
A second mortgage is one which is second in line to the first should there be a foreclosure or sale. The first mortgage holder gets paid entirely before the second gets anything unless there is some other agreement worked out.
So it’s possible to have a home equity loan that’s secured by a first or second mortgage, and it’s possible to have a first or second mortgage that is not a line of credit and cannot be drawn upon beyond the initial loan.
That’s not quite right. The priority of the mortgages only matters if the first lender is the first to foreclose. If the second mortgage holder forecloses first it gets its money notwithstanding the first mortgage.
If the second holder forecloses, where does the first get its money if it doesn’t have any claim anymore? Is it left holding the bag with no collateral? Nope, that’s not the way it works. I suggest you consult with a mortgage broker or title expert if this is important to you.
I’ve never signed a HELOC agreement that doesn’t have language in it where the 2nd lender subordinates their loans to the primary lender. (Though in my case, the same bank was both.)
However, unless there is a huge downturn in the market, it shouldn’t matter all that much because HELOCs are once again being written so that you can’t borrow more than 80 or 85% of your home’s current value (from any source). That gives them a nice buffer should you default and they have to sell your home to cover your debt.
This.
I’m actually surprised that it’s only 36% of Canadians because every single time I’ve bought a house a HELOC was included as a part of the deal. It’s almost always been useful, it’s nice having a source of short term cash when I’m moving and moving banks and funds are in flux.
Having access to credit is in no way equivilent to carrying debt so I’d be curious about what criteria they were using to determine the percentages. If it’s HELOC’s with a balance the 36% number makes more sense.
Just to clarify, the difference can be found in the name. A home equity line of credit (HELOC) is exactly that - a revolving line of credit that can be drawn against and paid down over and over again. It works exactly like a credit card secured by your house. A second mortgage is a one time, fixed amount of funds to be paid back in equal monthly installments and, once paid in full, goes away. It works exactly like your first mortgage.
The buyer at the foreclosure sale takes title subject to the existing mortgage. It’s somewhat counterintuitive but that’s the way it works.*
The mortgage agreement is a contract between the borrower and lender. The law makes the second mortgage subordinate to the senior mortgage, but that doesn’t prevent the second mortgagor from foreclosing.
*you may wish to do a little research before snarking in future.
Well, I think you’re right about Canadians jumping hip-deep in using their homes for easy credit, too - I was watching the news last night, and the sports segment was prefaced by the sports guy standing in front of a big ole ad for “Use your home equity for easy money!” (to paraphrase). Dammit. Have we learned nothing from 2008?
I’m pretty sure that what everyone learned was “Selling mortgages is a lucrative business and when you securitize and resell the loans, everyone else pays when something goes wrong.”
You talking to me? Your link supports what I said exactly.
And the government will bail you out when you fail spectacularly.