There is more than just earthquakes shaking up California these days. Real estate values continue to decline, rendering homeowners unable to sell, unable to refinance, stuck with higher rates, and in the very worst cases, facing foreclosure. MSN Real Estate just named 5 California markets that will have over a 50% chance of declining over the next two years.
There are few that would argue when I say, this is risky business. Further compounding the risk is the fact the real estate industry as a whole, is not very savvy when it comes to dealing with shrinking and even negative equities. Watching your net worth disappear right under your nose has not been so painful since the dot com bust a few years back. But hey, at least we weren't living in our stock portfolios!
You may not have control over the economics of a downward spiral in real estate, but you can ride out the cycle and sleep better at night with some really cheap insurance: Get an equityline. Get it NOW.
An equityline will make your equity accessible, while you still HAVE equity. If you wait until your equity disappears, or until tightening mortgage restrictions render you (or your home) unable to qualify, you have just given up a very, very cheap, tax deductable loan, that has little or no closing costs, that may save you from a disaster. DO NOT WAIT.
If you already have an equityline in use (charged up due to a remodel, for example) behind a low interest first mortgage, protect yourself against the payment going up by fixing the rate. If your equityline lender does not offer this as an option, by all means refinance the equityline with a lender who will. Equitylines have very high caps (limits on how high a rate can go), and you do not want to take a chance on a 12% rate on a $200,000 line.
Once the line is in place, please remember it is an insurance policy, and DO NOT SPEND. This is especially important if your first mortgage is an adjustable rate mortgage. Should you ever be in a negative equity position (you owe more on the house than it's value) you will be unable to refinance and forced to let your rate adjust. If you cannot afford the extra $300 a month, you can at least use your equityline to keep you afloat until the market corrects itself.
Yes, you are "going negative" on the house another $3600 per year. But if the alternative is to ruin your credit and lose your house, an equityline just may help you ride out the storm and emerge still in the house, with credit intact, and values once again on the rise.
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California Mortgage Expert based out of the San Francisco Bay Area. Specializing in cutting edge strategies and solutions for buying, selling, and financing California real estate.
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An equityline will make your equity accessible, while you still HAVE equity. If you wait until your equity disappears, or until tightening mortgage restrictions render you (or your home) unable to qualify, you have justgiven up a very, very cheap, tax deductable loan, that has little or no closing costs, that may save you from a disaster. DO NOT WAIT.
This may be the best advice a Californian can read. We call this strategy "collaring your equity", taken from the hedging strategy of option collars.
Run, don't walk to Janet's office to collar your equity.
Though I bought my own home 12 years ago for a crazy price (it was an REO) and have a ton of equity, I still FINALLY just started the process of getting an equity line.. For the same reasons you've mentioned. This is my first "tough" market I've weathered as a real estate professional and it can give some peace of mind for the long haul. Other than getting a new roof this summer, I don't intend to use it for much of anything UNLESS I need it...
What are the going rates I should be looking for?
Hi Catherine:
Equitylines are always adjustables with the prime rate as the index. Prime is 8.25% right now. They are usually amortized over 30 years with a 10 year period of interest only. The way the rates work is like this:
The higher the line amount, the lower the rate. I always encourage people to take out more than they think, because of reasons stated in this blog, plus, many clients come back a year later, needing additional funds, and a new line, or a higher limit, than I had previously set up.
The lower the loan to value, the lower the rate. If first mortgage and equityline combined still leave you with alot of equity, your rate will be lower.
A higher credit score (680+) will usually allow you to go stated income, and also get a better rate.
Do not accept any equityline that has more than a $500 prepayment penalty. (Stay away from credit unions...they have ridiculous prepayment penalites)
Closing costs should be low...a few hundred dollars. I don't like NO closing costs, because the rates are higher. I never charge any points on my equitylines. Just a policy of mine, as it works very well to give new clients a chance to work with me, to see how I operate, and I think of it as a service to my existing clients.
Depending on these factors, rate would range from 7.5% to 8.5% unless credit was low, or loan to value was high.
If you would like me to set this up for you, please call me.(I keep thinking our paths will cross one of these days, since we both share this great place called Walnut Creek.) We are the blog sisters of Walnut Creek!
Janet..... you make some good points here. This article was mentioned here : Mortgage Gems -- Blogs to better understand mortgages