Lenders are starting to make equity loans again, especially where home values are rising.
But you won’t be able to borrow against every last cent of your equity, even with great credit, don’t expect to borrow more than 85% of your home’s value. For example, that if your home is worth $400,000 and your mortgage balance is $280,000 (70% of the value), you could borrow, at most, $60,000.
Once home equity lending starts up in earnest, we’ll find out if the recession really did sober us up about borrowing. Lenders are cautious now, and they’re unlikely to let you get into deep trouble.
It’s not free money. This sounds obvious, so forgive us. But spending home equity is consumption, not an investment. On average, homeowners get back about 61% of each dollar spent on remodeling. That’s down from nearly 87% in 2006, but up from last year’s 58% return.
Your payment can rise. Home equity lines of credit generally use adjustable interest rates. That means your minimum payment is certain to rise, since rates have nowhere to go but up.
You could lose your home. Fall behind on your payments and the lender can foreclose. Home equity products were behind some of the worst abuses of bubble-era lending.