Dead equity - Do you need to take out a home loan?

Lenders trying to urge homeowners to take out home equity loans

The housing market has had explosive growth during the last five or six years and prices have reached levels that were previously unimaginable. Many people have benefited from this; the rise in prices has been great for homeowners and lenders, particularly since interest rates have been low in the meantime. In addition to the tremendous number of home sales, lenders have also done well with refinancing, as millions of Americans have traded in older, more expensive loans for cheaper ones.

Unfortunately, all good things must come to an end, and the rise in interest rates over the last two years has put quite a dent in both the home financing and refinancing market. What are lenders to do? They have attempted to revitalize the refinancing market by urging homeowners to put their “dead” equity to work.

And what is “dead” equity, anyway? There really is no such term. Equity is simply the difference between what your home is worth and how much is owed upon it. If your property is worth $250,000 and you owe $150,000 on your mortgage, then you have $100,000 in equity. There really isn’t any other meaning for the term.

But lenders have coined the term “dead’ to describe equity that has no loan against it. In the eyes of many lenders, equity that just sits there is of no use to the homeowner. These lenders suggest that the equity be put to use by borrowing against it and using the money for investments, or vacations or home remodeling or whatever. Equity that isn’t doing anything, in the eyes of lenders, is “dead’ and is serving no purpose for the homeowner.

Of course, many disagree. Equity is an increase in value, and it can sit there for a rainy day, or until the home is sold. It need not be put in jeopardy as collateral for a loan; it can just sit. For most Americans, the equity in their home is their single largest asset, and borrowing against it would risk that asset.

It might make sense, however, for homeowners with a large amount of value in their homes to consider a home equity line of credit. A line of credit, or HELOC, isn’t exactly a loan; it is an opportunity to borrow money either now or at some later date. A HELOC is a great way to put the value in your home to good use by preparing it to be used later, perhaps in a case of an unforeseen emergency. That is the best way to make use of home value that is currently sitting there.

As for borrowing against your home just for the sake of borrowing, that seems like a silly idea. Americans, as a whole, already have way too much debt, and there is no reason to borrow just to borrow. A loan to reduce or consolidate debt might make sense, but borrowing money simply because you do not already have a loan sounds like very poor financial advice.

If you need a loan, by all means, get one. But don’t let anyone talk you into a loan that you don’t need.