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Home Equity Rising how to Best Access: HELOC vs Sell and Buy New Pros and Cons
Hello Folks, my name is Kyle Petty, and I am a Real Estate Advisor for Better Homes and Gardens Paracle of Cary, NC. Recently an article came across my computer screen from Bankrate.com and the first thing that jumped out to me was the headline “311k in Equity in the Average American home”. I, like many of you, looked at it and balked yeah right, however upon reading it and doing some of my own research it is indeed true. In fact, according to the NAR, home prices are expected to continue to rise by 15-25% over the next 5 years, by this point you are probably asking yourself how I can get access to all of that. Well, the good news is there are multiple ways to do so, but today we are going to just touch on the two most common ones. HELOCs and homes sales are the answers with the key difference being that a HELOC or “home equity line of credit”, you maintain the ownership of that home while taking a loan out on the newly minted equity. Many prefer this option because of the stability that comes with staying in your school district and home etc. while still accessing the equity. With a home sale however, you get the cold hard cash and can go back to the market to search for an upgrade while keeping some of the excess equity money. This option is preferable to those looking to get access to the equity for less risk while still reaping the benefits.
We must, as they say, start at the beginning. Well maybe not the complete beginning but back to the subprime lending crisis the country experienced in 2007. Banks were handing out loans to anyone with a pulse so when defaults began to rise it led to economic ruin. It took years for America to dig their way out of the crisis, however some of those loans nearly sent us back down the road towards collapse years later if not for swift action from the banks holding them to notify customers and offer different options to subvert foreclosures. The loans most responsible for this potential secondary collapse, due to carrying the greatest default risk were HELOCs. You see the “interest only” payment structure for the first 10 years on the loan followed by a subsequent rise thereafter, when principal payments are included creates a rate shock as the payment jumps according to Finance-commerce.com. This article from 2014, 7 years after the major crash, HELOCs led to a 20% increased risk of default. Even today the risk of default with HELOCs is much higher than conventional mortgages. The risk from that balloon payment coupled with fluctuating market conditions sometimes results in putting their borrower’s upside down in their mortgages and behind on their payment obligations.
The inverse of this, however, is home sales which allows you to get your equity out quickly with little to no risk beyond the difficulty of finding a new property. Many are not comfortable with this option as it leaves them between dwellings for a short time, and the fear that they will not be able to find another property in the areas they love that fits their criteria. The market right now in the Triangle is growing fast and that risk is mitigated by this growth. Ultimately it is for the consumer to decide what the better fit for them is. In these market conditions however, some feel the benefit of selling and pocketing that profit while getting back on the market to look for a upgrade is enticing while others may seek the stability offered by a HELOC to stay in their homes while accessing more money for their day to day. What would you choose?
If you are looking to sell or in the market for a new home, simply fill out the contact form on my website and I would be happy to help! I will reach out to you within 24 hours!
Sources
Home equity data and statistics: Why they matter to homeowners,
https://www.bankrate.com/home-equity/homeowner-equity-data-and-statistics/#statistics
Default risk rises on U.S. home-equity loans,
