Should You Take Out a Home Equity Loan?

Should you consider taking out a second mortgage to tap your home equity or is that just setting yourself up for foreclosure?

Despite there still being 11 million U.S. homeowners underwater according to CoreLogic home equity loans continue to make a comeback.

Wells Fargo reports a 19% increase in home equity lines of credit in 2012 with JP Morgan Chase at 31%. According to Equifax borrowers took out $7.2 billion in home equity lines between January and October 2012 alone. The average line was $90,000, just $10,000 less than during the boom times of 2006.

Expect a lot more in 2013 as the real estate recovery spreads and home equity rises quickly. Considering the type of credit you need to have to get one of these mortgage loans you’d think those taking them out would be more cautious than in the boom and would be utilizing them extremely cautiously. But if this is the case why are so many homeowners tapping so much equity in such a hurry?

Banks are only happy to extend this credit now with the trend in rising home values expected to continue for at least the next 10 years, meaning foreclosing will be a plus.

Certainly it’s common sense not to tap your home equity to pay for 99% of spending items. Some might argue the advantages for debt consolidation and home improvements that add value but it is still risky by any measure.

With the size of these lines many may likely use them to invest in additional properties to take advantage of the market. Some will use them to buy investment properties with cash or use them as bridge loans until they can sell current homes for more.

The logic makes sense; that the returns are there and shouldn’t be missed out on. Just remember that you are putting your roof on the line. That may be fine if you don’t have family, but for those with kids carefully analyze the downside and have a plan B to pay it back.