Thinking Long Term About Newfound Home Equity

Source: Federal Reserve

Prices are up, property tax assessments are likely up, you’re rich, rich, rich … on paper. According to researchers Black Knight, as of the end of 2017, Americans have $5.4 trillion in “tappable” home equity, an increase of $735 billion from the end of 2016. Tappable means that while total home equity, according to the Federal Reserve, sits at $14.4 trillion, only $5.4 trillion would be available using loan products requiring 20 percent equity remain in the property.

Put in perspective, $5.4 trillion is about 10 percent more than in 2005, before everything went to shit.  But there’s tappable and there’s tappable.  Three quarters of that equity is also held in mortgages with rates lower than current rates. Of the $5.4 trillion, approximately half is held by property owners with at least a credit score of 760 (qualifying for the lower refinance rates).

In 2017, $262 billion in equity was cashed out of properties, a lower percentage then in 2016 with the fourth quarter of 2017 being the lowest percentage in four years. The average tapper has a credit score of 744 and took $68,000 on average.

Source: Federal Reserve

While this sounds pretty peachy, it’s important to note that Texas, still shaking off the effects of Hurricane Harvey, was listed as having the fourth highest percentage of seriously delinquent loans (loans over 90 day past due). While this only represents 2.27 percent of loans, it’s a 60.64 percent increase year-over-year. Zooming out to a six-month window and Texas has the second highest deterioration of delinquent mortgages (any past due mortgage) at 6.5 percent, 2.7 percentage points higher than the national average.

If you’re like me, all this equity has resulted in mail- and in-boxes overflowing with various loan offers wanting to unburden me from my home equity.

The Three Options

If you want to cash out some equity while maintaining your currently sweet mortgage rate, a HELOC (Home Equity Line of Credit) does that. But in a time of rising interest rates, the average HELOC’s adjustable rates may increase your payback unexpectedly.  Also, while HELOC interest used to be tax deductible, the new tax overhaul says that they’re deductible only if they’re used for home improvements or purchase. And even then, the interest counts towards the $10,000 total for state and local tax deductions … so again, the money may cost you more in the long run.

Usually referred to as second mortgages or home equity loans, these options offer fixed rates (unlike the typical HELOC). The downside is that like any mortgage, the loan amount is fixed, so if a project winds up costing more after the loan is dry, you’re a little stuck. Be aware that these products are subject to the same restrictions on money usage as a HELOC if you want to take the interest deduction.

Cash-out refinancing is where you simply get a new, larger first mortgage on your home. As I wrote above, it’s likely your current mortgage is at a lower rate so you would be paying more for the money. However, a new first mortgage, even at a higher rate, may be a better option than a variable-rate HELOC now that rates seem to be on a long term upwards trajectory.

It’s all about the numbers and there are any number of calculators online to help you figure out which is your best route.

Source: Federal Reserve

However, Beware …

Just because you can tap equity, doesn’t mean you should.  Memories should be long enough to recall the Recession, where millions of homeowners’ mortgages were turned upside-down, owing more than the home was worth.

For the past few years, Dallas has been a building site. But as the graphic above shows, the increases are due to population growth, but also underbuilding.  Once home construction catches up (years, not months), what will happen to prices?  Will they soften? Plateau?  A glut sure won’t make prices rise. Ditto on wages.  If wages don’t increase, affordability will erode pricing.

When you’re contemplating adding to your long-term debt, you have to think long term, planning for the worst … or at least to the end of the loan term.

 

Remember:  High-rises, HOAs and renovation are my beat. But I also appreciate modern and historical architecture balanced against the YIMBY movement. In 2016 and 2017, the National Association of Real Estate Editors recognized my writing with two Bronze (2016, 2017) and two Silver (2016, 2017) awards.  Have a story to tell or a marriage proposal to make?  Shoot me an email sharewithjon@candysdirt.com. Be sure to look for me on Facebook and Twitter. You won’t find me, but you’re welcome to look.