Some Good News About Your Personal Finances -Timing is Right for Homeowners to Tap Equity

Earl Bradley
Chief Executive Officer
First Federal Savings Bank
Feb 17, 2011

When the U.S. economy slid into a recession beginning in late 2007, consumer confidence plummeted with it. Unemployment has hovered around 10 percent. Job layoffs and other financial hardships have touched many families for the first time, and a general uncertainty among buyers has heavily influenced their purchasing decisions. The natural tendency for many families has been to behave like prudent businesses, buckling down, trimming budgets and reducing costs where possible.

In spite of these dim realities, there are some rare positive side effects of the recession. Among them: If you own a home, it is an ideal time to cross off items on your wish list and still make a smart, practical financial decision. Right now, for instance, there are some very sound reasons to secure a home equity line of credit to finance home improvement projects.

  1. Convert existing equity into a financial resource. Homeowners who have lived in the same place for several years could have tens of thousands of dollars of equity at their disposal and may not even be aware that it can be easily liquidated for all types of expenses, including home improvements. If you are considering a renovation but don't have the cash on hand, then a home equity line of credit is worth evaluating as a financing option. For most people, available equity is simply the difference between the appraised property value and the outstanding mortgage, or total amount owed. Fortunately Tennessee has been somewhat shielded by the housing decline that hit hard in markets like California and Florida. While local real estate values may not be as high as they were three years ago, Clarksville and surrounding areas has withstood better than most.
  2. Borrow money at ridiculously low rates. Lenders approach every loan application with tighter scrutiny than they did, say, five years ago, but current financing terms are extremely attractive for people with good credit and a good debt-to-income ratio. There are deals to be had on everything from cars to boats. Even fixed-rate mortgage loans have been 5 percent or less for the past 24 to 36 months. Home improvements are often financed through a home equity line of credit because, in addition to the equity liquidation mentioned above, the funds can be used as needed for a long period of time. In other words, the account holder(s) draws money to make purchases now and in the future, similar to a credit card account, but with much better rates.
  3. Interest rates will soon rise. We can be certain that as the economy strengthens, the Federal Reserve will begin to adjust prime interest rates back to pre-recession levels, and banks and other lenders will follow suit. Low interest rates on all types of loans could go up sometime this year and into 2012. If you are on the fence about any type of financing, now is the time to lock in a rate and avoid paying too much interest.
  4. Make a practical investment in the future. For most families, their home is their greatest asset, and one of the only assets that appreciates in value. Homeowners carry a tremendous amount of pride and responsibility in the upkeep and improvements to their home. Every penny poured into it is an investment that can be enjoyed in the short term and a reward to be reaped in the future. Most home improvements provide a greater financial return at the time of sale than they originally cost. In fact, it is common for homeowners to make repairs and upgrades for the explicit purpose of making a home more attractive so it will sell quickly. An investment in a home is a sensible investment in the future.
  5. Community and economic benefits. There are many good, hard-working local contractors, painters, landscapers and other tradesmen and women eager to earn your business. Hiring a professional or team of professionals to work on your home improvement project may give a much-needed boost to Clarksville's small businesses. Request some bids, and you are also sure to find contractors are not only aggressive in quoting jobs large and small, but they are also more competitive on price now than they once were.

Tapping into your home equity to finance a renovation project is a great way to reinvest in your home. Take advantage of low interest rates now to jumpstart a project that will provide immediate and long-term rewards.