Friday, August 26, 2005

HELOC's eat up Home Equity

Initially intended to smooth over unexpected expenses and provide a safety cushion in the event of emergency repairs home equity loans are now used to cover everything from discretionary purchases like telivisions and hot tubs to significant expenses Kitchen renovations and College Education.

Most HELOC borrowers assume the value of their home will go up and one day they can just sell their home and the loan will be paid off. However, with the increasing risk of a Real Estate Bubble and saturation of the housing market this assumption could put your equity in danger.

Let's say you bought your house for $175,000 but it was recently appraised for $275,000. If you were able to sell for anything close to the appraised value and you'll reap a tidy profit. Now throw a $75,000 HELOC balance into the equation. As you can see, the selling prices in your area need only sag a bit and you can be unable to net enough on the sale of your home to pay off both the mortgage and HELOC balances.


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