- The Washington Times - Friday, January 10, 2003

The recession is over. A Reuters dispatch last week quoted "an elite economic panel," the American Economic Association, as saying the recession bottomed out during November through December 2001.

So the economy is on the way up, and has been for a year or more, according to some experts. But here's the proviso and there's always a proviso we don't know if recovery has truly begun or if we're headed for a "double-dip" recession. Investopedia.com defines a double-dip recession as an economy in which gross domestic product (GDP) growth slides back to negative after a quarter or two of growth. In other words, it's a recession followed by a short-lived recovery, followed by another recession.

So the good news is that, if the American Economic Association is right, the hardest economic times from the latest recession are behind us. That's also the bad news, because if the recession is over, you can soon kiss goodbye those amazingly low, record-setting interest rates.

Have you taken advantage of these rates? For once, my grandchildren will get to say, "boy, if only we had the interest rates that grandpa had in the early 2000s."

With a 30-year, fixed-rate loan at 5.75 percent, you could have a monthly principal and interest payment of $1,167 on a $200,000 mortgage. Change that interest rate to 7 percent, and your payment jumps to $1,330. Tack on an additional $200 for taxes and insurance per month, and the difference in these two payments means you would have to pay $4,356 more per year to buy the same house. Over the 30-year life of the loan, that difference is worth $130,680.

As the economy improves, the first increase will be to the prime rate charged by the Federal Reserve Bank. The prime rate actually affects home equity lines of credit more than it does traditional mortgage rates, which are usually based on the bond market.

Currently, lines of credit are available with about 4 percent to 5 percent interest. That's really cheap money. Low rates aren't the only reason to sign up for a line of credit. I am a strong proponent of debt reduction and staying out of debt. I'm also, however, a proponent of protecting your financial security with sound debt management. (For an in-depth rundown on how home equity lines of credit work, visit the Federal Trade Commission's page on lines of credit at www.ftc.gov/bcp/conline/pubs/homes/homequt.htm.)

A line of credit, however, is not an upfront debt. It's simply a way to access the equity in your home by way of a checkbook or credit card.

Caution: One major piece of information homeowners should be aware of is that a line of credit on your home means your house is the collateral for the loan. Unlike a credit card, if you get behind in payments, you could find yourself in foreclosure.

With that said, a home equity line of credit (HELOC) can obviously provide the funds you need for a home improvement project such as remodeling or upgrading your home. That really goes without saying. Most homeowners, however, open a line of credit because they need it right now.

Might I suggest opening a line of credit when you don't need it. Get it open and leave it open for emergencies, future debt reduction or real estate investments, for instance. I've had many an e-mail from consumers who want to make a quick buck by flipping an investment property because they need money right now when they're sitting on a pile of equity in their current home. The problem is, the reason they need money now is because they are in dire straits financially lost job, medical emergency, unexpected auto expense. The list goes on.

Unfortunately, it's when many people need access to their home's equity the most that they cannot get access to it. If you lose your job and you're sitting on $50,000 equity, which could float you to your next position, you're not going to be able to gain access to it without sufficient income to pay it back.

If you had signed up for the HELOC months earlier, when your job was stable, then it would be there when you need it. And why not have it set up when interest rates are at record low levels?

Please, keep in mind the spirit in which I'm discussing this type of dipping into your home equity. If you find yourself in financial distress because you have a difficult time managing debt you may not be the best candidate to dip into your home's equity on top of your already swelling debt load.

Talk with a good loan officer about the pros and cons of a line of credit versus an actual cash-out refinance to figure which is best for your personal situation.

M. Anthony Carr has written about real estate for more than 13 years. Reach him by e-mail ([email protected]).


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