The underwater mortgage
The new chronic problem with about 25% of US homeowners is having an “underwater” mortgage. That means homeowners that owe more than their homes are worth. Due to declining home values from the recession, homeowners find themselves in just such a position. Recent studies are showing that before the recession makes a marked change for the better, about 50% of homeowners will find themselves with “underwater” mortgages.
The good mortgage news
There is good news though, when it comes to the overall state of mortgages today. Though the number of underwater mortgages is expected to increase, but there are a number of homeowners that are safe. A study by First American CoreLogic, is showing that about 23 million homeowners have 20% or more equity in their properties, and about 1 million more own their houses outright. Owners in this position are faced with the question of what to do with their equity. Although it’s great to have a good amount of equity in a property, there are two concerns that every homeowner needs to face:
- If homeowners borrow against their equity and home prices continue to fall, they could end up in the “underwater” position.
- If homeowners don’t borrow against their equity, the cash that could have been used might vanish.
The general rule of thumb is to never borrow more than 80% of the value of a house. That way, a decline in value won’t annihilate any cushion if owners lose equity.
What to do with equity
When it comes to figuring out what to do with equity, there are some options that homeowners look into. Debt consolidation, home remodeling and buying a car are three things that homeowners typically use home equity funds on. Though this may be a convenient option, looking at each deeper reveals how little advantage there really is to each one of them.
Debt Consolidation. It’s no secret that many Americans are mired in debt. Many homeowners move to consolidate when they have high interest credit. This may sound like a good idea, but in reality there is more to the equation. Once a consumer turns their debt around by putting their home on the line, they have transferred their problem into a secured debt. It might be better to file bankruptcy as it eliminates debt completely. It’s only a good idea to turn equity into a loan for bills is if the total amount owed is low and the reason for debt is well known. Homeowners should know what created the debt in the first place, and set about changing bad habits.
Home remodeling. Another thing people with high equity look into is home remodeling. A lot of homeowners think a remodel means added value automatically, that isn’t always the case. Some changes can add value, but not every remodel will result in a return. A rule of thumb when it comes to home remodeling is to pay with it for cash, rather than take equity out of the house. The most popular renovations are bathroom and kitchen remodeling. Any could bring a great return on investment if managed with care, kept on a budget, and paid for with cash.
Car purchasing. Some homeowners might use home equity to buy a new car. One-hundred percent of the time this is a bad idea. Why? Largely thanks to cars losing value the second you buy them. A general rule of thumb is to make a purchase funded by home equity only if that purchase appreciates in value. Cars aren’t in that category. If a car is a necessity and the only option is using a home equity loan, then the car needs to be paid off as quickly as possible.
Equity should not be taken lightly
Due to the high number of “underwater” mortgages out there, anyone who has equity in their property should guard it cautiously. Things such as home remodeling, buying cars, and debt consolidation might sound like great ideas, but experts disagree. It’s better to leave equity where it is than risk losing it with an unwise move.
