When you bought a home, you never expected a windfall in as little as three
years. But many homeowners are watching their home equity rise to
unprecedented levels, proving that home ownership is not only a good
investment decision, it's also a very useful source of cash. The wave of
home sales and refinancing throughout the country are providing cash to
support home improvements, retirement, college tuition and other purchases.
Not only is that good for homeowners, it's actually providing a safety net
for the faltering economy, as refinancings and home equity loans generate
enough consumer spending to give the country a shot in the arm.
Approximately two-thirds of the nation's homeowners are riding the crest in
appreciation, a spectacular $2.5 trillion rise in home values over the last
three years. Home prices have been shooting up, scoring annual double-digit
gains nationally. The median price in June was $152, 600, up almost 9
percent already from last year. Some metropolitan areas are experiencing a
huge boom with homes doubling and even tripling in value. All that equity
allows homeowners to save or spend, depending on their needs. It's an
opportunity to cancel private mortgage insurance, and save hundreds or
thousands per year in premiums. Homeowners with a 20% equity level (25% if
your mortgage is less than five years old) are typically eligible for
cancellation of PMI, so long as you have a good payment history. Perhaps
your high interest credit cards and other consumer debts are pinching you.
Within reason, you can fold those debts into a home equity loan with a lower
interest rate and lower monthly payments, and even deduct the interest on any
loan amount up to 100 percent of your home's value.
But on the spending side, as homeowners cash out on their equity or sell
their homes at a substantial gain, the money is pumped into the economy.
Experts are saying that rising home values have been the last line of
defense against recession. "The housing sector has been a very important
contributor to the American economy and, I think, one of the major reasons
why that litany of negatives which you can easily line up has not in fact
cracked the economy's underlying stability," Federal Reserve Chairman Alan
Greenspan recently told the Senate Banking Committee. "The rise in the value
of homes -- which if anything has accelerated during this period of rapid
decline in stock prices -- has created a very substantial buffer of
unrealized capital gains, which are being drawn down through the home equity
market, through cash-outs, through the turnover of existing homes," he said.
On a cautionary note, some experts are skeptical that the boom will last
forever. After the housing boom of the 1980s, losses of 10 percent in home
prices soon followed in the early 1990s. Harvard University housing experts
are saying that consumers are not gaining if they are using their wealth on
paper to increase their housing debt to higher and higher levels. Today's $5
trillion in mortgage debt is more than the total debt of corporations and the
federal government combined.
Sources used to create this article include Patrice Hill and The Washington