For several months, I have been bombarded with commercials on XM radio about refinancing and home equity lines of credit. Yes, I agree that if you have not looked at refinancing in the last few years, you should certainly give it a look now. Interest rates are extremely low and, if you are staying in your home for a while, a refinance could be a great way to save money- long term.
My concern is the focus on home equity lines of credit. Please know that HELOC's are a great tool, when used responsibly. I have a HELOC currently on my personal home. Where HELOC's can get to you into trouble are when all of the available equity in a home is pulled out for a remodeling project, for example. When all of a homeowner's available equity is accessed and then spent on an improvement, or to pay off revolving debt, or to purchase a new car, the homeowner is then subject to market conditions.
What do you mean subject to market conditions?
If a homeowner gets a HELOC, spends the money, and then chooses to or has to sell their home, they better hope their home is worth what is owed on it. When a HELOC is obtained through a lender, the lender will order an appraisal to determine how much equity exists by determining the fair market value of the home and then subtracting the mortgage balance. Most banks will allow a homeowner to access up to 85 percent of their available equity when obtaining a HELOC. And that seems like a safe number, until the market heads into a downturn.
I remember a similar boom in HELOC's before the recession. I also remember meeting with homeowners right after the recession began who had maxed out their HELOC and suddenly found themselves upside down in their home. Meaning they owed more on their home than it was worth at the time. In many cases, I witnessed seller's writing checks at the closing table in order to sell their home. That's right. Instead of getting a proceeds check from the sale of their home, they were writing a check for the remaining balance of their mortgage that was not satisfied by the sale.
That was not very long ago and since the recovery we have seen an unprecedented rate of appreciation in home values. It has been awesome for me, as a seller's agent, to see homeowners win again after witnessing how hard it was for them during the recession. But my caution is, and to slightly over-simplify, what goes up must come down. And pulling out all of your available equity right before what the market suggests is a downturn is not a safe idea.
As we wrapped up Q3 this year, for the first time since the recovery we saw zip codes where Q3 2019 median home prices were less than Q3 2018. In addition, in many areas of town housing inventory continues to rise, and not just seasonally. As available housing increases, home prices inevitably will come down in order for sellers to compete.
Here we are just three weeks from Christmas and I know that a HELOC can be an attractive option to access cash. My warning, and it comes from the heart, is to please consult your Realtor and ask him or her for a detailed analysis of your neighborhood before you consider maxing out your HELOC. In the event that life happens and you must sell your home, we want you to receive a check at the closing table rather than write one.