Home Equity Still a Great Option for Homeowners
The number of homeowners tapping into the equity they've built up in recent years is beginning to rise, in line with better economic indicators for homeowners across the board.
The number of homeowners tapping into the equity they've built up in recent years is beginning to rise, in line with better economic indicators for homeowners across the board. In fact, New York Federal Reserve President William Dudley went so far as to comment on and encourage the growing home equity trend in a recent speech to the National Retail Federation, Marketwatch reported.
"Tapping into home equity can provide many benefits for homeowners."
"The good news is that, while the current [economic] expansion is quite old in chronological terms, it is still relatively young in terms of the health of household finances, " Dudley said. "Whatever the timing, a return to a reasonable pattern of home equity extraction would be a positive development for retailers, and would provide a boost to economic growth."
More home equity is certainly good for businesses in terms of its net effect on the economy, but it's homeowners who stand to gain them most from it in the near term. The key, as Dudley elaborated on somewhat in his speech, is to use that equity prudently.
Home equity trends
Since home equity is determined by mortgage values and shifting appraisal figures, it's generally safe to assume that as the average sales price of houses rises, so does the number and amount of equity loans being withdrawn. Indeed, the most recent data on home equity withdrawals seems to be matching up with this trend. Marketwatch reported that net home equity withdrawals (as in cash value minus construction costs) posted their first increase since around 2010.
In addition, the average U.S. home value has been increasing at a rapid clip since 2012, according to an index compiled by Zillow. In just the last year, that average has risen 6.8 percent, much faster than the rate of either inflation or general economic growth. Over the next year, Zillow estimates home values to continue rising at a rate of 3.5 percent.
However, as Fed President Dudley noted, there are some differences between today's real estate finance environment and that of the last economic expansion. Notably, fewer homeowners seem to be tapping into home equity to finance other purchases. While it's not always advisable to do so, or to take out a bigger loan than necessary, it is still possible to use home equity responsibly.
How home equity works
A home equity loan or the more common home equity line of credit can be great for homeowners looking to make extensive renovations. By taking out a lump sum loan or a HELOC, homeowners gain some financial wiggle room to make much-needed repairs. For example, if something like the furnace gives out in the middle of winter, it might be tough to put together enough money all at once to cover the cost. And when it's something as crucial and expensive as that, being tight on cash could pose a big problem.
There are also plenty of non-emergency reasons to use a home equity loan or HELOC when it comes to household fixes. As Hal Dundick wrote in Nerdwallet, many older homes require large-scale repairs to replace old plumbing or fill in a foundation, which can be very pricey. Or perhaps you are looking to sell soon and want to add value to the property, maybe through upgrading the kitchen or adding an outdoor patio. Financing these projects with home equity makes it possible to effectively invest mortgage savings back into the home, as well as spread these costs out over time.
As useful as a home equity loan is in some situations, be wise about when to consider it and when to look at other financing options. HELOCs tend to work similarly to credit cards but come with lower interest rates, for instance, but home equity can be the riskier form of debt. In the event that a home equity loan isn't paid off, the borrower could lose the house altogether. That's why it always makes sense to do the homework on home equity financing, weighing all the potential risks and benefits against one another.
Talk to your local Vectra Bank professionals for more information about home equity loans and lines of credit today! Please call our TeleLoan line at 1–888–294–7838 or visit one of our personal bankers at a branch near you.