Bubbles and crashes in real estate over the last few years taught homeowners a few lessons: For one thing, don’t expose yourself to interest-rate or credit risks with exotic mortgages on your primary residence, unless you have liquid reserves to cover that debt if things go against you. For example, interest rates really can cause the cost of an ARM to go up. Balloon mortgages really do have to be paid off, regardless of how difficult it is to refinance when that time comes. And not only can the value of a home decrease, but there may even be periods when it’s impossible to sell for any reasonable price.
Lenders and owners of mortgage-backed securities learned a few lessons of their own, which for a time made it more difficult and expensive to take equity out of a home. However, most of them have by now taken their lumps and learned their lessons: No more liar loans, and no more rigged appraisals. The mortgage origination market is once again hot, and loans are being made at record low interest rates.
Government, the one entity that never seems to learn, is still out there subsidizing loans: not only via the tax credit for mortgage interest, but also through its patrons Fannie Mae and Freddie Mac (can you believe those are still around?). Consequently, if you have good credit this is the best time to leverage your home equity. Today’s WSJ article on the subject notes:
[P]eople who have a potentially profitable use for that money—preferably an investment—could come out ahead using this strategy. A borrower who takes out a mortgage at 4.5% is essentially borrowing money for free on an after-tax, after-inflation basis, assuming he is in the 33% marginal tax bracket and inflation returns to its long-term average 3% or more.
If you were thinking of moving to a better house this may be a doubly excellent time to do so: The higher end of the market was hit hardest and has been slowest to show signs of recovery. I am trading up to a better house that is selling below its build cost and, thanks to some aggressive mortgage shopping, I am financing the purchase with a 3.5%, zero-point, 5/1 conforming ARM.