Q.Two years ago, we took out a home equity line of credit (HELOC) of $50,000 to pay for our daughter’s four-year college education. The loan has worked out well because the interest rate is tied to the prime rate, which has been declining.
We are concerned, however, that the equity in our home has diminished because of the housing slump. The balance of our first trust is about $450,000 and we have drawn about $20,000 from the HELOC. When we took out the HELOC, our home appraised for $575,000. Today, I don’t think we could sell it for much more than $500,000.
We have no plans to move, so our equity position doesn’t really alarm us. We also have no problem making the monthly payments, and we have great credit, but I’m afraid if the lender finds out that our property value has dropped, it will cancel our HELOC. Is this something that should concern us?
A. Millions of American homeowners are feeling “less wealthy” because their home values are no longer appreciating and many are even declining. This sentiment exacerbates the current slumping economy because it tends to make folks tighten their purse strings, sending less money into the economy.
Indeed, your overall net worth is likely a lot lower today than it was two years ago unless other assets I don’t know about substantially increased in value.
Let’s compare your housing and mortgage picture.
Two years ago, your mortgage debt totaled $450,000 secured to a property worth $575,000. Your equity in the home stood at $125,000.
Today, your mortgage debt totals $470,000 and your property value is $500,000, making your equity stake in the home $30,000. You are now $95,000 poorer even though you are only $20,000 more in debt.
It’s no wonder you may be dining out less, taking a less costly vacation, and spending less at the department store. The mere fact that you asked me this question is evidence that you are, with good reason, feeling less wealthy.
Let me answer your question specifically. I have not heard of a lender that is receiving timely payments from the borrower suddenly demand that the loan terms be modified because of falling property values. To be sure, read your promissory note carefully. If there is nothing in the text of the note that allows the lender to reappraise the property and give it a right to call the loan or modify the terms, you shouldn’t have a concern as long as you make timely interest payments.
Your question, however, prompts me to make a couple of comments to be sure folks like you keep things in perspective.
First, remember that a house doesn’t know or care if there is mortgage debt secured to the property. The house will appreciate or depreciate naturally based on market conditions. The amount of debt secured against the property does not change this fact.
Second, as I have said many times before, real estate tends to appreciate over time, but not without periods of temporary decline. Unless you are very unlucky, your house will be worth a lot more than $575,000 many years from now.
Third, despite the media attention, the real estate investors who are getting burned are those who, for one reason or another, are not able to hold the property for an extended period. In most cases, these are the folks who speculated by buying in a frenzied market with the assumption that property values always rise. These folks, hoping to make a killing by flipping the property, are now stuck with an asset that is temporarily worth less than they paid, and often with an unaffordable mortgage.
This does not describe your situation. Make your mortgage payments on time, send your daughter through college and pay down your mortgage loan when you can over time. My guess is that you will have plenty of equity many years from now.
— Henry Savage is president of PMC mortgage in Alexandria. Reach him by e-mail at henrysavage@pmcmortgage.com.
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