If there's one thing American investors love, it's an over-inflated market. Which is why they keep buying houses and new ones keep coming onto market. According to latest data, housing starts rose an annualized 3.4% in September, matching a 17-year high. Whoo-ha! Go, baby go.I wonder if people buying these houses, for ever-rising prices, are same people who couldn't get enough Amazon.com stock at $100 or Lucent shares for $75? Having been burned in stock market, I guess they decided to re-invest what was left in their homes. Are we in a housing bubble? I don't know, but I suspect that we are, at least in some areas of country.
Don't misunderstand me, now. I own a home, and I think home ownership is one of great freedoms we enjoy in this country. I get nervous about people who are pulling all equity out of their homes with new mortgages. I suspect that most of these people are spending equity, not investing it. What they're left with is a larger mortgage, and a bunch of worthless Chinese made goods.
The current low-interest rate environment is a once-in-a-lifetime chance to lock in a cheap 30-year mortgage on your home. If you refinance balance of your current mortgage, you've won. If you refinance, and max out on your equity, you're probably hurting yourself. You might say that by refinancing equity in your home, you're just cashing in on your home's rise in value. Well, not exactly.
What you're really doing is collateralizing portion of house that you own to get a cash loan, with intention of paying back loan at a later date. You've really transferred ownership of equity in your house to your lender, not cashed it out. If you want to cash out your equity, you have to sell your house, plain and simple.
For those who are buying new homes, low interest environment is a double-edged sword. On one hand, you can get a tremendous rate on a 30-year mortgage, likes of which you see once in a lifetime. On other hand, because we live in a world where monthly payment is all that matters, lower interest rate mean higher home prices. The monthly payment stays same, but now you've got a much higher mortgage balance, which could turn around to bite you in future.
The dangers of refinancing equity out of your home are readily apparent, but why shouldn't you buy a home in current environment?
I'm not saying you shouldn't. What I'm saying is you have to be careful. Most real estate professionals understand that monthly payment matters, not price of house, when selling a house. Therefore, lower interest rates fall, more money can be charged for a house. If you're a home buyer, with a set amount of money for a downpayment, price of house will determine how much equity you start with. And, it determines whether you get a conventional mortgage, with 20% down, or some other form with less downpayment. That equity percentage will determine whether you'll be paying for great rip-off known as Private Mortgage Insurance (PMI). Trust me, it's just another monthly payout that goes down a giant rat-hole. There's no value in PMI, and you don't want to pay it.