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How Homeowners Are Creatively Using Their Equity

homes1201_1by LISA SCONTRAS

Home values are up around the country, according to the latest quarterly report by the National Association of Realtors (NAR). In fact, the majority of metropolitan areas experienced robust year-over-year price gains, with the national median price showing the strongest annual growth in nearly eight years.

Honolulu came in as the third-most expensive housing market in the U.S. with a Median Sales Price (MSP) of $679,800 behind San Jose and San Francisco, where the MSP was $805,000 and $705,000, respectively.

Eighty-eight percent of markets surveyed showed an increase in median single-family home prices based on year over year third quarter closings.

Lawrence Yun, NAR chief economist, said market momentum is changing.

“Rising prices and higher interest rates have taken a bite out of housing affordability,” he said. “However, we have the ongoing situation of more buyers than sellers in the market, so lower sales will help to take the pressure off home price growth and allow them to rise slowly at a single-digit growth rate in 2014.”

Limited housing supply was cited as the biggest factor in price performance in the past year, with inventory levels bouncing around at 13-year lows – the same trend driving the Oahu market.

The rise in property values on the Mainland and here on Oahu is good news for homeowners, especially those looking to renovate their home or qualify for an equity loan.

“High property values mean more money is available to borrow,” said Leonard Fernandes, vice president and manager of the Residential Credit Center at First Hawaiian Bank. “When the market value increases, the amount a lender is willing to loan also increases.”

Fernandes explained that lenders will normally lend up to 80 percent of the appraised value of a single-family home for a conforming loan. The most popular reasons homeowners are tapping into their equity? Debt consolidation, college or private school tuition, home renovations, business and land purchases, and as a down payment on another property.

For Verna Chow and her husband, an interest-only Equity FirstLine from First Hawaiian Bank enabled them to downsize in a competitive market.

“We were at a stage in our lives where we needed to downsize,” Chow said. What she and her husband found out quickly is there are a lot of other seniors doing the same.

“We wanted a single-level home and those are hard to find. There aren’t many of them,” Chow continued. “And when you do, seniors are fighting over them, and a lot of them have cash in hand because they’d already sold their home.”

Chow and her husband considered selling their home first and renting, so they would have the cash available to buy a home when they found one suitable. But they wanted to get in on the low interest rates and with rising prices, wanted to buy before prices went up too high. So they opted instead for an Equity FirstLine, which provided them the cash for a down payment.

“We took out our home equity, so when we found our home we were ready to go,” she added. “I was surprised how much we paid for a house half the size of my house of 38 years, but with our equity loan, we were able to offer more than asking to out bid the other 10 offers that came in on this house.”

The increase in property values and equity opens up opportunities for homeowners like Verna Chow to accomplish their goals. Many homeowners may consider using home equity, rather than credit cards, to pay for big-ticket items.

“The biggest advantage over credit cards and other loan types is the lower interest rates,” Fernandes said. “Conforming mortgage interest rates are still very close to all-time low APRs. Other advantages include the interest on a mortgage loan (which) may also be tax deductible. You should consult with your tax adviser regarding the deductibility of interest, but you can choose your terms on mortgage loans. You can opt for a 10-, 20-, or 30-year term – you choose. You may be able to decrease your monthly debt obligations by consolidating your payments into one smaller payment. Having cash available offers a lot of flexibility.”

The opinions, statements and views contained in this article are those of the author, and do not necessarily represent the views of First Hawaiian Bank or its management. First Hawaiian Bank does not warrant that the information herein is accurate, complete or current.

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