Should You Take Out a Home Equity Loan in a Slow Housing Market?

This probably isn’t shocking news anymore, but: the housing market is slow in many areas of the country.

Such decreased activity doesn’t just come into play for potential borrowers; owners considering a home equity loan must also be aware of present and future conditions.

For the most part, home equity loans are categorized as “smart debt.” The interest rates are lower than they are for most other kinds of consumer credit, while typically being tax-deductible. But if you borrow the maximum amount - and a soft housing market significantly reduces the value of your home - you could end up owing more than your home is worth.

That’s a problem.

A housing market on the decline could tip the scales in favor of a fixed-rate home equity loan rather than a home equity line of credit, which generally has a variable rate. The variable rate will rise with other factors such as the prime rate, which will increase the cost of your credit over time.

Moreover, with a loan rather than a line of credit, you won’t be tempted to continually tap into that credit and risk getting in over your head.

Being conservative in taking out any loans - using the money for safe investments such as home renovations or your children’s college education - becomes even more important when the housing market is slowing.

Keep in mind: A slow housing market is NOT a good time to borrow more than 75 percent to 80 percent of your home’s equity. A high loan-to-value ratio puts you at more risk if a job transfer or other personal situation forces you to sell the house. How come?

Because in a slower housing market, you might not find a deal to pay off both the mortgage loan and the home equity loan.

However, if you are conservative and cautious in your approach, Lending Tree states, a home equity loan will continue to be “smart debt” even if the housing market is slowing.