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Home Equity Spree Turns Into Billions In Debt Staff - Mortgage Lenders Plus.com

Thirty years ago, home equity was just a quiet wealth accumulation device, humming in the background and adding a little something to the nest egg every year.  But about twelve years ago, the California home appreciation phenomenon started to appear in other areas of the country and home equity financing became a mainstream option. In 2001, it really took off.

There have been three home equity financing waves since 1993, according to real estate analysts.  The first two pale in comparison to what has occurred since 2001.  According to the Federal mortgage agency Fannie Mae, American homeowners cashed out an estimated $480 billion in home equity during the refinancing craze that began in 2001 and tapered off in 2005.  That’s more than 250% of the equity taken out from 1003 to 2000.

Part of the temptation has been record low mortgage and home equity loan rates.  The result has been that almost three quarters of these homeowners – 74% to be exact – ended up with an average of six more years on their mortgages.  Just seventeen percent of those taking advantage of the home equity financing opportunity chose to shorten the mortgage term, usually opting to convert to a fifteen year mortgage.
 
The home equity loan rates drew millions of converts and as a result, the homeowners in the United States owed more than twice as much on home equity financing and lines of credit by mid-2004 than they did in 1998; this according to the Fed.

Just as the 100 percent home buying spree occurred with millions of buyers looking only at near term results, home equity financing seems to be a process that also has “no tomorrow.”   Commented on real estate analyst, "Someone in their 40s who has refinanced into a new, 30-year term has realistically signed themselves on for a mortgage until they are actuarially (likely to be) dead. It's the mortgage in perpetuity."

The impact on national statistics is interesting.  Today, a little over 69% of American households own their own homes.  That’s an impressive number, one that has climbed steadily for one hundred years.  However due to home equity financing these same home owners own significantly less of their homes today than in recent decades. According to the Federal Reserve Board the average household debt is about 45 percent of the value of the home, up from 32 percent in 1973.

Average mortgage debt is expected to continue rising, in part because many first-time buyers are opting for interest-only loans. With these loans, they don't start paying on the loan principal for three to 10 years.  People who engage in 100 percent financing or who use the dual mortgage, piggyback loan approach to home financing are facing not only a primary mortgage payment, but also a secondary loan priced at home equity loan rates. 

The degree to which new home sales and home equity financing is based on interest only loans has alarmed the mortgage reinsurance industry, which has called for a curb on some of the more onerous loan terms available today as adjustable rate financing.  Nevertheless, ratio of debt to home value is going to increase for the foreseeable future.