Q. This real estate market is a major concern to many of us. Houses appear to be depreciating in value, many of us are uncertain about the future and we do not want to lose the equity in the home we have owned for many years.
It has been suggested that we make arrangements to obtain a home equity loan, and are interested in your comments?
A. There has been a lot of doom and gloom talk about the slowdown in the real estate market. There also is a lot of truth to the problems that the real estate industry is facing. However, real estate is not at all dead. One has to step back and look at the situation objectively -- and optimistically.
Many sellers are finding that there is a demand for their property, but at prices much lower than the seller is willing to accept. However, property values have not dramatically fallen to unconscionably low levels.
While it is true that people who bought their house two or three years ago may not be able to break even now, for the majority of homeowners who have owned their home for a number of years, in my opinion property values are only leveling off, or correcting, rather than appreciating as they have in the past. I suspect that this leveling off will be with us for a long time.
Accordingly, appraisals also are taking into consideration this leveling off in the real estate market and, in my opinion, now is the time to lock in a home equity loan -- taking a home equity loan for as much as you can comfortably qualify under your bank's loan terms.
Home equity loans are one of the few remaining tax deductions available to the American taxpayer. Generally speaking, the interest paid on home equity indebtedness up to $100,000 is deductible, although every taxpayer should confirm his or her situation with a tax advisor.
The tax rules are complex and this column is not responding to the tax aspects of your question.
Many banks are offering attractive promotional deals to encourage homeowners to obtain home equity loans. Some banks are offering low initial rates for a period of time, in some cases up to six months, while other banks are prepared to pay all closing costs associated with the home equity loan transaction.
I recommend that most homeowners give serious thought to obtaining a home equity line of credit, now. This is especially true if your bank is offering special incentive programs.
Keep in mind that once you have the home equity line of credit, you should only pay interest on the money you actually borrow.
For example, if you obtain a home equity line of credit for $100,000, but you only borrow $5,000, you should only pay interest on the actual amount borrowed. Make sure that your lender will charge you only for the actual amount that you are borrowing.
Once you have established a line of credit, in effect you can borrow from the bank merely by writing a check. You will be able to use this line of credit for a period of time -- in some cases several years -- and in my opinion the availability of a line of credit will protect you in the event of an unforeseen financial emergency.
If you wait until your house drops further in value, your ability to tap into a higher line of credit may be jeopardized.
But there is a distinction between the availability of the line of credit and actually using it. Keep in mind that regardless of what the line of credit is called, it is a second trust on your personal residence.
If you cannot afford to make the required monthly payments or if your note becomes due at a fixed time, there always is the possibility that you can lose your house if you are unable to keep current on your home equity line of credit.
You should also compare the rates offered by lenders on home equity credit loans. Often, these rates are based on a percentage over the prime rate. Indeed, some lenders are even offering home equity loans at the prime rate.
While the prime rate has dropped in recent years we have no guarantee that next year, because of economic conditions and the Iraqi situation, the prime may go up sky high, as it did in the early 1980s.
While you may be able to afford the interest on the money you have used out of your home equity loan today at 10 percent, you want to make sure that if your rate goes up next year, you will have the ability to make those payments.
Alternatively, as I have indicated, you may lose your house.
Thus, while the home equity line of credit is a very valuable tool, it cannot be used as a blank check. You want to keep it available in the event of an emergency. But you cannot abuse or misuse the money, since you are taking the money out of your home equity.
Consumer confidence is very low now. In my opinion, anyone who has some cash today might very well consider investing in depressed real estate, since we all hope that prices will begin to appreciate soon.
Based on my concerns that state and federal legislation may begin to put restrictions on the availability of the home equity loan, and because of diminishing appraised values of real estate, in my opinion, this is the time to lock in your home equity loan.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036.