Numbers Count: Got equity? More homeowners do.

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Numbers count. They matter to bankers and to prospective homebuyers, sellers, and real estate professionals. Here’s my take on the key numbers on the housing market this week.

Airedale dog sitting in a doorway of house. [1]The numbers: The inventory of loans in negative equity positions dropped by 31% (1.5 million) in 2015, Black Knight Financial Services reported April 4 in its monthly Mortgage Monitor Report [2]. Highlighting the uneven distribution of underwater borrowers, the report also found that over half of the nation’s properties with negative equity are in the lowest-priced 20% of homes. Negative equity, or underwater, homeowners represented 6.5% of all owners at the end of 2015, which is still high by historical standards.

What counts: This new report is a good opportunity to remind people that through the end of 2016, underwater borrowers may still apply to refinance their mortgage through the Home Affordable Refinance Program (HARP) [3]. This is a government-supported program to help underwater borrowers refinance. As we’ve written about in the past [4], this is a potentially valuable way to take advantage of lower interest rates for eligible borrowers who meet the requirements, which include having a loan-to-value (LTV) on a home greater than 80%, and staying current on mortgage payments.

This negative equity data is also an opportunity to remember the benefits homeowners may enjoy from building equity in their property through regular mortgage payments combined with home price appreciation. I frequently talk to homeowners who don’t realize how much equity they have accumulated in their home and the financial flexibility that may come with that strong equity position.

Many homeowners take advantage of equity in their homes to seek a home equity line of credit, or HELOC. A HELOC is a line of credit secured by your home that allows you to tap into equity you’ve built up through price appreciation and mortgage payments. The line of credit provides access to cash, which traditionally homeowners have used for home improvements, consolidating debt, education expenses, or as a rainy-day fund that can be tapped for unexpected expenses. Here are a few things to keep in mind about HELOCs:

  • Rates tend to be lower than rates on credit cards because they are secured by a home, so lenders view them as less risky than other types of credit.
  • They provide flexibility: You can borrow what you need when you need it, and in addition to making monthly payments, you can pay down the balance whenever you have extra cash.
  • They typically have an initial “draw period” when you can tap the line of credit, and the monthly payment is interest-only. This keeps the monthly payment relatively low during the draw period since you are not paying down principal. If you only make the minimum interest-only payments during the draw period, be prepared for a larger monthly payment of interest plus principal once the draw period expires.
  • Rates are typically adjustable, and so in a period of rising rates — as we are in now — your monthly payment will likely go up as interest rates rise.
  • Finally, the line of credit is secured by your home, so the lender has a claim on the property to recover the outstanding balance if you are unable to repay the HELOC.

Negative home equity may reduce your financial flexibility, while positive equity may open opportunities, such as a home equity line of credit. As with any credit product, one of the keys to unlocking the benefits of positive equity is understanding the lending product you are considering so you know the potential risks and benefits.

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[2] monthly Mortgage Monitor Report:

[3] Home Affordable Refinance Program (HARP):

[4] As we’ve written about in the past:

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