Home equity may be harder to tap than you think

Home equity may not be there for emergency use. How to prepare.

Anyone who has paid any attention to the news in recent years knows that real estate prices throughout the country have reached record high levels. This is bad for buyers but good for homeowners whether they’re selling or just living in their existing house. The increased value of a property increases its equity. The equity is the difference between the value of the house and the amount you owe on it. In short, it’s the portion of the house that you own. The more the values increase, the more your equity increases.

Americans have been taking advantage of these equity increases by borrowing against their equity and using the money for all manner of things - businesses, second homes, recreational vehicles, education, you name it. The interest on the loans is tax deductible and the interest rates are more favorable than they are for other types of loans, such as credit card loans.

Plus, home equity loans and home equity lines of credit are great for emergencies. Or are they?

The answer to that is a qualified “maybe.” Yes, it’s nice to have home equity, and many Americans have recently found that they have hundreds of thousands of dollars worth of equity at their disposal. You would think that this would be a great untapped source of funds should an emergency arise. What if you lose your job, get ill, or are injured in an accident? What if you can’t earn money for a while? “No worries”, you may think. “I’ve got all that equity. I’ll just borrow against it until things get better.”

You’d better think again. As many Americans with large equity have recently found out, it’s not so easy to borrow money, even against your own home, if you actually need it. Once you are out of work or cannot demonstrate regular income, you will find yourself unable to secure a loan, even if you are borrowing against $100,000 or more in your own home’s equity. Lenders always want to make sure they can be repaid, and if you cannot demonstrate sufficient income to repay the equity loan, you won’t be able to secure the loan in the first place.

This results in people having a lot of “cash” in equity that cannot necessarily be turned into cash if they need it. What can you do?

The answer is to plan ahead. No, you can’t get a loan if you are out of work, but you can plan ahead and arrange to get a loan before you need it. The best solution for this is a home equity line of credit. A line of credit isn’t a loan per se; it’s a revolving line of credit that uses your equity as collateral. You can apply for the loan and you will be issued checks or a credit card that can be used to draw against your balance, which is secured by your equity. Aside from a small annual fee which some lenders require, there are no other expenses unless you actually borrow the money. Otherwise, your line of credit sits there and waits for the day when you need it.

Emergencies come without warning. Plan ahead and look into a home equity line of credit today.