Home Equity Loans: An Historic Perspective on Home Services

Jan

Home Equity Loans: An Historic Perspective

posted by admin in Home Loan Services

Home equity loans grew popular in the 1980s, as lenders let homeowners borrow as much as 100 percent of their equity. But in 2007, that practice was given a major overhaul.
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During the wild and bullish price run experienced across housing markets at the beginning of the 21st century, home prices exhibited steep, phenomenal increases. Overnight wealth-at least on paper-was created for millions of homeowners who watched their houses grow more valuable by the hour. These instant millionaires realized that they could borrow money based on the market value of their homes, and home equity lenders welcomed them with open arms and deep purses. Homes as ATMsSoon, Americans across the demographic spectrum started viewing their primary residences as gigantic treasure chests, withdrawing mountains of cash, as if the typical single-family home or condo was an automated teller machine. Recent economic history is littered with stories of consumers who used home equity loans to finance everything from luxurious cars, jewelry, and clothing, to extravagant weddings and vacations. But for many of these exuberant borrowers, their easy wealth turned out to be a paper tiger, and the path from rags to riches reversed itself, leaving them strapped with debt or on a collision course with foreclosure.Home equity loans created illusionsThe tables turned when home values collapsed. The market price of real estate created the underlying benchmark for how much you can borrow with a home equity loan, and when that value eroded, equity tumbled. People who have grown accustomed to spending their equity on lifestyle expenses were suddenly bereft of funds. They may have attempted to sell their properties to raise enough cash to pay back their outstanding debts, but if the homes weren’t worth much, they wound up stuck with loans that they couldn’t repay. As interest rates rose and credit shrank, options dwindled. Unable to repay their home equity loans, homeowners found it even harder to break even by selling. Consider, for example, what could potentially happen to a consumer who borrowed $300,000 with a home equity loan back in 2004, based on a home value of $400,000. If the home lost 25 percent of its value, the consumer might wind up owing the entire value of the house just to pay back the home equity loan. Meanwhile, buyers are now few and far between, so nobody can come to the homeowner’s rescue.But home equity loans aren’t going to go the way of subprimes. Those who use them prudently are able to powerfully leverage real estate assets for a reasonable price, and can manage them in a way that makes them affordable and easy to repay. What’s changed is that lenders are more skeptical than ever, and they won’t be handing out home equity loans with the reckless abandon that they showed before they created this current crisis. That may be tough for some homeowners to swallow, but it’s probably the healthiest development, financially speaking, in the history of American home equity loans.