Mortgage Reality Check: Home Equity Loans are Still Alive and Well

By Richard Barrington Columnist

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For all the concern about the real estate market going into a slump, falling housing prices have yet to make a dent in the home equity of the average home owner. This is important for individuals and for a broader view of the economy, since home equity loans are an important means of turning assets into liquidity.


Home Equity Still Rising With Prices

Home equity is the difference between what a house is worth and what the home owner still owes on the mortgage. Because of this, home equity will vary when home prices fluctuate. As a result, the amount of money available via home equity loans can rise and fall depending on home prices.

For all the talk about a housing slump, home prices still rose for the year ending June 30, 2007 (the exception being areas that had undergone double-digit increases recently and are experiencing corrective price drops now). Real estate is one of those rare markets in which price increases are so commonplace that even a slowing in the rate of increase can be referred to as a "slump". However, since prices on average have not yet declined, this slump should not affect the availability of home equity loans in most places.

Mortgages Provide Natural Momentum for Home Equity

The other factor is that mortgages provide a natural momentum for building home equity. As you pay down the principal of your mortgage, you are building home equity--slowly in the early years of a mortgage, but by several percentage points a year in the later stages. So unless house prices are actually declining at a pretty fast clip, the normal process of paying down mortgages is building home equity.

In short, home prices may be struggling to rise, but even with modest increases home equity--and home equity loans--will remain alive and well.

Office of Federal Housing Enterprise Oversight

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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