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Cash out HELOCs (home equity line of credit) are over for most U.S. homeowners due to decreasing home values and tougher lending standards. Maybe a garage sale is the only way to get cash out of your home now.
A larger brutality of homeownership is that many homeowners may find themselves stuck with a home and unable to “move up”. Just as ever rising home values allowed owners to keep leveraging their way up the scale of homes decreasing values will have the opposite effect.
Here’s an interesting exercise. The table below uses a purchase price of $425,000 with a 20% down payment ($85,000) and a 30 year mortgage.
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Purchase
Price |
Down
Payment |
Mortgage
Amount |
Home Value
after 1 Year |
Homeowner’s
Equity
after 1 yr. |
Debt to
Equity |
| 5% home value increase |
$425,000 |
$85,000 |
$340,000 |
$446,250 |
$109,490 |
24% |
| |
|
|
|
|
|
|
| 5% home value decrease |
$425,000 |
$85,000 |
$340,000 |
$403,750 |
$66,990 |
16% |
| * 30 year mortgage at 7.125% reducing principal balance approximately $3,240 in the first year. |
If you have 20% equity in your home, either due to a recent purchase or re-financing with cash out, your ability to sell for the foreseeable future and “move up”, is severely limited without additional cash other than your current home’s equity. Even 15 year mortgages that whittle the principal down much faster, does not solve the problem. Great place to start with your home’s value might be www.zillow.com that will provide you with a Zestimate® on your home.
| |
Purchase
Price |
Down
Payment |
Mortgage
Amount |
Home Value
after 1 Year |
Homeowner’s
Equity
after 1 yr. |
Debt to
Equity |
| 5% home value increase |
$425,000 |
$85,000 |
$340,000 |
$446,250 |
$119,450 |
26% |
| |
|
|
|
|
|
|
| 5% home value decrease |
$425,000 |
$85,000 |
$340,000 |
$403,750 |
$76,950 |
19% |
| * 15 year mortgage at 6.875% reducing principal balance approximately $13,200 in the first year. |
The tough concept to now understand is that any homeowner with a mortgage in a declining market area (which are now many) is financing a depreciating asset, long term. Opps, basic law of finance is to finance depreciating assets, short term. Well we all need to live somewhere, enjoy your home and cheer when a home is sold on your block, it’s going to be awhile to sell off all those empty homes in developments and McMansions in tear down neighborhoods.
If your garage sale generates some extra cash, maybe use your newly cleaned out garage to start a business.
To contact the writer of this article email: info@americangaragemagazine.com |
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