What Real Estate Ups and Downs Mean to Home Equity Mortgage Shoppers

By Richard Barrington
LoanPage.com Columnist

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For all the news about distressed mortgage holders, a far greater segment of the market is represented by homeowners who have steadily made their mortgage payments over a series of years. Some of these homeowners might be considering a home equity mortgage, and wondering what recent real estate news means to them.

While the slump in housing prices may affect some home equity borrowers, the drop in mortgage rates is probably a more important--and positive--development.

Prices and Mortgage Rates: Opposite, but Not Offsetting

For home equity shoppers, the best-case scenario would be high real estate prices and low mortgage rates, but the current environment has both real estate prices and mortgage rates falling.

On the surface, this would seem to be a wash--home equity shoppers have one factor in their favor, and one factor against them. However, while home prices and mortgage rates are exerting opposite pulls on home owners, the effects are not offsetting.

Mortgage Rates Are More Important in the Long Run

The key is that while home prices and mortgage rates both affect home equity borrowers, they affect different elements of the loan. Home prices determine how much equity the homeowner has available; mortgage rates determine the cost of borrowing money.

For most homeowners, the recent dip in housing prices will reduce, but not eliminate, the amount of home equity that can be used for mortgage collateral. This limits the ability to borrow but does not cost the home equity borrower more money. Lower mortgage rates, on the other hand, directly represent savings to the borrower.

So while this environment isn't ideal for home equity borrowers, it's not bad, either. It means that you can borrow less but save more.

Associated Press

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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