Once upon a time, homes were like piggy banks. That's where people saved. Now, you're treating homes as if they were credit cards. That's where you borrow when you're looking for extra money. Home prices have been rising nicely in most parts of the country. The National Association of Realtors expects a median gain this year of 4.6 percent.
Normally, home prices fall during a slowdown or recession, but this time sales and values are holding up.
Homeowners are borrowing heavily against those gains, especially in the past two years. Some banks will lend more than 100 percent of what the property is worth.
Many banks let you make tiny down payments. Or they'll minimize your monthly payment. Wells Fargo just launched a mortgage that lets you pay only interest (no principal) for the first five or seven years.
"People are stretching, lenders are stretching," said Nicholas Retsinas, director of the Joint Center for Housing Studies at Harvard University.
With real-estate prices up, you'd think that Americans would be rolling in home equity. But as fast as they lay hands on it, they're borrowing it out.
Americans owned an average of 70 percent of the value of their homes in 1980. That dropped to 62 percent in 1990 and 55 percent over the past decade.
Put another way, we're gambling on larger mortgages to help us maintain our style of life.Cashing out
The most popular form of borrowing is becoming "cash-out" mortgage refinancing. With cash-outs, you take a larger mortgage against your house. Most of the proceeds go toward paying off the mortgage you had before. The rest of the money is available for other things.
In January, cash-outs made up 32 percent of all the refinancings at Wells Fargo Bank. In May, they reached 42 percent, said national sales manager Brad Blackwell.
With a larger loan, your monthly payment will go up, but you might get a lower mortgage rate than you had before. Rates currently average 7.24 percent on a 30-year fixed-rate loan (assuming you pay no points up front). Jumbo loans, for $275,000 and up, cost a quarter percent more.
You normally pay the same kinds of closing costs that you did when you borrowed before origination fee, appraisal, attorney's fees and so on. There's also a financial check to see if you qualify for additional borrowing.
Alternatively, you could take a home-equity loan. The size of the average home-equity loan leaped by 33 percent last year, to $34,318, according to the Consumer Bankers Association.
Interest rates have been plunging, Bankrate.com reported. You might pay around 7.5 percent (that's a variable rate) perhaps with a 6.5 percent introductory rate for the first few months. Some lenders don't even charge closing costs.
So compare both options over the time you expect to be in your home.
The home-equity loan might be the better deal.Equity options
Traditionally, people tapped their home equity only for big-league purposes say, for college tuition or renovating the house. Then they started to borrow for money to pay off credit-card debt. Mortgage interest is tax-deductible while credit-card interest isn't.
In the mid-'90s, you started borrowing to invest.
It might pay to carry a larger mortgage in order to make the maximum contribution to a 401(k). You might also borrow to buy a second home, if your job is secure and you could afford two mortgages even in harder times. But borrowing to buy tech stocks was obviously a dumb idea.
Look into your soul before borrowing to pay off credit-card debt. If you've been overspending your income, a clean credit card becomes an invitation to shop, shop, shop. You're better off paying your bills with current income, so you can learn budgeting and impulse control.
As for mortgages like Wells Fargo's think long and hard before taking a loan that requires no principal payments.
On a $400,000, five-year, interest-only loan, you'd pay $328 a month less than you'd pay on a conventional loan (assuming 7 percent interest). But at the end of the term, you'd still owe the original $400,000.
Don't kid yourself into liking larger interest payments because they increase your tax deduction. You're paying the bank real money, after tax.
Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.
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