It's no wonder many homeowners feel as if they're sitting on a gold mine.
For the past four years, average house prices across the country have jumped more than 7.5 percent, or more than three times the rate of inflation, according to federal housing statisticians. And the increases have been even steeper in the Washington area -- in the double digits year after year.
But if you do not plan to sell your house, what good is all that gold? Mostly, it can be a source of ready cash, albeit usually as a loan.
Plenty of homeowners have already tapped into their home equity, with federal studies estimating that hundreds of billions of dollars have been borrowed annually in cash-out refinancings recently.
But how much of your equity should you tap? What kind of loans should you take out? And can you avoid losing sleep over the possibility that home prices could stop climbing or, horrors, take a dip?
The answer to those questions, financial advisers say, is that there is no single answer. What you should do depends on things like how long you intend to stay in your home and whether you are headed toward marriage, facing college tuition, ready to retire, retired and struggling to pay bills, facing medical expenses, or choked with credit card debt.
"It all depends on your individual circumstances. That's why it's hard to give a blanket answer," said Alexandra Armstrong of financial advisers Armstrong MacIntyre & Severns Inc. in downtown Washington. But she and others say now is a good time to reevaluate home financing decisions because mortgage rates are so low.
And the good news for homeowners is that there is an unprecedented variety of loan options: traditional 30-year fixed-rate mortgages, an adjustable-rate mortgages (ARM) that adjust each month or that remain stable for a period of a year to 10 years before the rates float, interest-only loans where the principal is not due until some time in the future, home-equity loans capped at a fixed rate, and home-equity lines of credit with rates tied to the prime rate or other variable indexes.
For senior citizens, there are reverse mortgages, in which the lender gives the owner a monthly payment, a line of credit or a lump sum to live off rather than the other way around.
But how do you know whether you should refinance into a bigger fixed-rate loan and cash out equity? Or whether you are a candidate for a home-equity line of credit, available at rates close to or just below the prime interest rate, which is about 4 percent?
Are you better suited for an ARM?
And what's the best use of the money you take out or save?
How about eliminating credit card debt? (Always good, financial advisers say, because credit cards carry high interest rates. But not good, if the borrowers intend to load up the cards again.)
Fixing the roof or making other home improvements? (Also a good idea, experts say, because the home's value will be protected.)
Paying off a car loan? (Depends.) Buying a second home? (Depends.) Taking a trip to Europe? (A longer shot.)
Borrowers should not blindly guess which loan is best or how much debt they should take on, those in the know say. You should look at your personal timeline for staying in the house and your individual needs for money, and then do the math, comparing the costs of the loan with the payback periods.
But just about all the nation's financial gurus say interest rates can't stay this low forever. "Homeowners should lock in the low interest rates now," New York personal financial consultant Stephen Leeb said.
But "everybody's different," said Augie Zullo, a broker with Access National Mortgage Corp. in Reston. "Some people know they're going to leave a house soon, so a 5-1 ARM [a low-rate loan that's capped for five years and then adjusts to a specific standard] makes sense for them. . . . Some people are in a jam and they don't have a choice -- for instance, they might be in a divorce and have to figure out how to pay legal fees -- so they've got to take money out of their house right now."
Others, Zullo said, "are just starting to catch up in the [stock] market and they don't want to touch that money" if they need cash, so they turn to their house.
"What starts out as a mortgage question really is a financial planning decision," he said. "Rather than saying you should do this or do that, this process really tells you what questions you ought to ask yourself about your finances."
Michael Rebibo, president of Access National Mortgage and a financial planner, said borrowers need to determine first why they need the money. "If it's a short-term need, a home equity line is going to be the best," he said, because the rates are lower than fixed-rate loans and because typically there are no closing costs. "Use it for paying off debt, for education or something similar," said Rebibo, "but plan to get rid of that balance relatively quickly."
However, he said, "If the need is long-term -- if you expect to carry the loan for more than three or four years -- I would go with a full" refinance into one larger, 30-year fixed-rate loan.
Financial planner Stephan Q. Cassaday of Cassaday & Co. in McLean is a believer in taking out as much equity as possible for as long as possible because rates are so low.
"One of the things that we advise our clients about mortgage debt is that if you can borrow money from a foolish person, you should do it," he said. If a lender offers a loan at 5 percent, he said, that works out to "3 or 4 percent on an after-tax basis."
If a client knows he is moving in a short time, Cassaday said, a home equity line is cheaper. But the borrower needs to understand that there are consequences if he doesn't move and interest rates jump.
While borrowers are also rushing to pay off mortgages or to refinance into 15-year mortgages from 30-year terms to get rid of mortgage debt, Cassaday said, "30-year loans are always better" because they provide more interest deductions and borrowers can still pay off the principal more quickly, if they desire.
What about homeowners who have a low balance left on their mortgage, too low to get a new loan of the same amount? Mortgage lenders typically won't refinance a loan of less than $100,000.
Financial experts say those borrowers often are refinancing into higher amounts to get cash for improvements or other needs. But they also see a trend toward borrowers paying off those loans with lines of credit that might bite later.
"In almost every case, paying off a first trust with a home equity line is a major mistake," said Rebibo, because the interest rate could jump. "If you're paying off a loan that's fixed at 6 percent with a home equity line that could go to 9 percent, you'll be sorry."
Greg McBride, senior analyst at Bankrate.com, is less negative about using equity lines to pay off low mortgages. "A lot of people are considering that right now because interest rates are so low," he said. "If you're that far into a mortgage, then you're not paying that much interest, so the value of the deduction is almost negligible."
While those borrowers could refinance into a bigger mortgage at a fixed rate, McBride says some homeowners don't want to pay closing costs or wrap them into a new loan.
What about using a line of credit to pay off a car loan? That "depends on what tax bracket you're in," said Armstrong. For higher-bracket borrowers, the deductibility of interest could make a difference.
But, she said, "if the car manufacturer is offering a 0 percent loan, it doesn't make sense to do it."
Rebibo weighs car loans and college loans the same way he weighs other short- and long-term needs. If you can pay the loan off in two or three years, it's a good idea, he said. If you can't, you might end up paying a lot more than you anticipated.
McBride said college loan rates "are very low right now, around 4 percent . . . so the thinking is that there's not much advantage in borrowing against home equity." A better option, he said, is for the student to borrow: "If the parents borrow, it could delay their retirement."
And what about using your first home to pay for a second one without tapping cash reserves?
McBride said using equity to buy second homes is "very popular." With mortgage rates "as low as they are," he said, "go cash-out" refinance to get the longest payback time.
One big group that can get a boost from high home prices is made up of seniors who are house-rich and cash poor. While they might be able to refinance small balances into bigger but still lower-cost loans and take cash out for ongoing needs or take out a line of credit, they have to have to have a sufficient income-to-debt ratio to qualify for the loan.
Another option for some is the reverse mortgage, in which homeowners 62 or older can borrow against the equity without having to sell the property, give up title or take on a new monthly payment.
Though the number of reverse mortgages is still small -- about 70,000 total for the nation -- and the closing costs are high at about 5 percent of the mortgage, the National Association of Reverse Mortgage Lenders says applications are mushrooming as seniors struggle to make ends meet.
Retired Marine Corps Col. Avery Chenoweth, 75, who lives at Leisure World of Virginia, a retirement community in Lansdowne, is a recent convert to reverse mortgages and now swears by them.
"I'd been under the misconception that you had to have a lot of equity in your house or that your house had to be completely paid off to get a reverse mortgage," Chenoweth said. But although he and his wife had bought their condo only four years ago and had only $70,000 in equity, they found that they could qualify for the reverse mortgage.
The couple owed a prepayment penalty on their existing loan and paid higher settlement fees than on a traditional mortgage, but Chenoweth said it was well worth it.
"The upshot is that for the rest of my life I can live in this condo paying nothing toward a mortgage," he said. "And I have an additional cash flow of $1,400 a month that was going toward the mortgage. It's like getting a new lease on life and a big raise."
Fort Washington mortgage broker Paul E. Skeens, of Carteret Mortgage Corp., sees another big group benefiting from the jump in appreciation -- homeowners stuck with a high-cost loans, such as those that involve monthly mortgage insurance payments attached to low-down-payment home-purchase loans.
These loans, such as Federal Housing Authority and Veterans Affairs loans or those with private mortgage insurance, are designed for buyers who do not have the cash for down payments of 20 percent. Without 20 percent equity, borrowers pay to insure lenders that they will not default.
Skeens said skyrocketing appreciation has helped many borrowers get out of these high-cost loans. A client, D.C. police officer Andy Daniels, took advantage of rising prices 14 months ago to move out of an Upper Marlboro townhouse he had owned for 14 years and to buy a bigger new house in Calvert County. The value of that house has gone up so much that he has been able to refinance out of the developer's higher loan rate to a fixed rate of 5.5 percent, while getting rid of his mortgage insurance payment.
This month, Daniels got an interest-only line of credit "so we can put in a pool and a new driveway." His wife and twin 10-year-old sons are happy, he said, and so is he.
