When you flip the switch, the light comes on. Turn on the faucet and the water flows out. Up until recently, many homeowners believed that access to equity financing was as simple and reliable as using those utilities around the house. Now it seems that the supply of money supporting home equity lending has run dry.
Change of tides
Just a few years ago, sharply rising home values created huge amounts of borrowing power for homeowners. Many non-housing industries were reaping the benefits, as homeowners tapped into that equity to fund anything and everything. Parents who'd saved very little could afford four-year college educations for their children simply by asking the bank for a home equity loan. Easy to get, inexpensive, and tax-deductible, it was often a better option than student loans or other education-specific financing programs.
Now, home equity loans have essentially lost the support of Wall Street investors. The change in tides is attributed to shockingly high default rates within riskier loan categories. Some lenders have reacted by cancelling many of their non-conforming loan offerings, including home equity loans. The lenders that continue to originate second mortgages are now approving only the most highly qualified borrowers.
College-bound students affected
The College Board estimates that the average costs of the 2006-2007 school year were $5,836 at public institutions, and $22,218 at their private counterparts. Four years at that rate adds up to almost $25,000 and $90,000, respectively. Families that expected the home equity loan to be the financing of last resort might find themselves in a pickle-and a sour one at that. The situation can be particularly problematic for students who've already made a commitment to their school of choice, only to find out that their parents can't afford to pay the bill.
There are still some good options for college financing, but most require advance planning. Financial aid paperwork usually needs to be submitted almost a year prior to the student's intended start date. Some banks offer personal loans to parents, albeit at higher interest rates than home equity loans. Student loans that are made to the student directly and payable after graduation may be one of the best solutions during this recessed real estate market. By the time a high school senior graduates from college, the mortgage industry may have corrected itself. Parents could then step in and help with paying off the loan.
Until the industry's money supply starts flowing again, many families will have to get by without home equity financing. While the college degree is attainable, many students may have to find a different means of paying for it. Home equity lending, at its peak, was probably too accessible; the tightening up of the industry serves as a reminder that money isn't an unlimited resource.
Home is still where the hearth is-it's just no longer where the money is.