Nearly a decade since the Great Recession decimated wealth in American real estate, we’re seeing the return of a major contributing factor that had all but disappeared from the industry. The home equity line of credit is back.
A HELOC is a line of credit backed by a homeowner’s real estate equity. Once approved, consumers can essentially charge their expenses to the HELOC like a credit card and then pay back the balance each month – usually with a much lower interest rate than a credit card.
Many consumers who bought homes in the early 2000s came to believe the good times would continue to roll and their home values could only increase. At the same time, many banks were practically giving away HELOCs to any property owner with a pulse.
HELOCs became like automated teller machines to many homeowners who would take out equity to pay for lavish vacations, fancy cars and other luxuries. When property values began to nose dive and loan interest rates reset at higher rates, they found themselves with no equity left.
“Underwater” on their homes (owing more in loans than their properties were worth), with monthly loan payments they could not afford, foreclosure became the only option for many. Consumers were bankrupted, while banks pleaded for the federal government to bail them out and save the U.S. and global economies from total collapse.
Needless to say, we don’t want to relive that nightmare again. Yet we’re feeling a bit of déjà vu lately, seeing more marketing mailers for HELOCs in our mailbox. A recent U.S. News and World Report article stated that HELOC originations increased nearly 5 percent from last year, while originations are up 190 percent since their low point in 2011.
Don’t let a slick marketing gimmick, visions of dream kitchens or vacations, rope you into a HELOC. We suggest leaving the equity in your home unless you absolutely need the funds.
The best way to build long-term wealth through real estate, what we tell our clients, is to pay off your first mortgage as quickly as possible – and exercise extreme caution when exploring the option of a second loan such as a HELOC.
As the saying goes, “Those who do not learn from history are doomed to repeat it.” Please contact us should you have questions about HELOCs or other real estate matters.