In the last five or six years, the prices of homes all over the country have gone through the roof. Because people don't trust the stock market and interest rates are low, a lot of money is going into real estate. To put this in perspective, look at the median household income, which is a little over $44,000, and compare it to the national median home price, which is $216,000. This is a very high multiple. Of course, the rise has been even more dramatic in many large cities, where a large portion of the country's population lives. The median home price in San Francisco rose from $375,000 in 2000 to $713,000 in early 2005.
For those who didn't get in at the right time, the situation is sad. However, many other people are sitting on potential gold mines; in many cases, their investments have doubled, tripled, or even quadrupled in just a few years. It's satisfying to walk and sleep on land that has gone up in value right in front of your eyes, and some people are happy to just count their chickens and not sell their gains. Others, for whatever reason, just want to have fun with their money. With home equity loans, you can do just that.
Because home prices have gone up, there are now more Americans than ever who can get home equity loans. Let me show you what I mean by giving you an example. Let's say you bought a $300,000 house five years ago and put down 20%, or $60,000. If you have a typical 30-year fixed mortgage, you haven't made much of a dent in the loan principal (in this case, $240,000) in the first five years. Now, let's say that the house value has gone up from $300,000 five years ago to $500,000 today. This is a very likely scenario in many cases. In this case, the value of your home would have gone from $60,000 (your down payment) to $260,000. (down payment plus unrealized capital gains). You would be able to get a loan based on the increased value of your home. Most institutions will give home equity credit for up to 50 percent of the home's total equity.
Now that we know that a rising real estate market has made many more people eligible for home equity lines of credit, let's talk about why this is a smart way to consolidate loans or get money. Home equity loans are usually the best way to get cash, whether it's for a personal reason like buying that Ferrari you've been eyeing or for your home business. First, home equity loans take advantage of tax breaks that the federal and state governments give to all homeowners. All interest payments made to pay off the loan are not taxed.
This benefit alone should make you think about getting a home equity loan. A family in the 30 percent federal income tax bracket will save a lot of money on a typical home equity loan. Because of what the tax break means, many people who don't need more credit take out home equity loans and invest elsewhere just to take advantage of Uncle Sam's kind gift. Second, home mortgages are handled a little differently than other consumer loans for two reasons. First, the loan is "secured" by a real asset, which is the house. The value of the land and the materials used to build the house make up the total value of the house. Second, there is a huge industry that only deals with home mortgages and home loans, which makes the market very competitive. This means that interest rates on home loans are much lower for the consumer.
So, let's review why a home equity line of credit is good for everyone. As home prices have gone up, more people have been able to get bigger loans, in many cases much bigger loans than they ever could have before. The Fed and a competitive mortgage market have kept interest rates low, which has kept the cost of borrowing low. Last but not least, federal and state tax breaks on home loans lower the cost of borrowing even more.
If you own your home and want to borrow money, you should look into a home equity line of credit before looking into other ways to get money.
