Richard F. DeMong is a longtime follower of mortgage market trends. A professor for 20 years, his research on home equity lending is widely quoted and he has taught seminars on equity analysis. His current research focuses on mortgage and home equity lending to prime and subprime borrowers. Here, Bankrate talks to professor DeMong about how home equity fits into the complete financial picture, how best to leverage it and how to get out and stay out of repayment trouble.
At a glance
Richard F. DeMong, Ph.D., CFA
- Virginia Bankers professor of Bank Management, McIntire School of Commerce
- Director of Center for Financial Research at University of Virginia
- Recipient: Chartered Financial Analyst Award (CFA)
- Research director, financial analyst Research Foundation (1982-1985)
- Retired Air Force colonel from the Air Force Reserves
- Written extensively for professional journals, including the Consumer Bankers Association and Journal of Retail Banking, on home equity lending and subprime lending, as well as bank investments
What is the role of home equity in a person’s overall financial success?
I always look at the home as an excellent investment in most situations; it gives you a place to live as you pay it off and build an asset. You may want to move to a smaller home or condo in retirement and then it's an excellent source of retirement funds. Reverse mortgages are becoming more popular. If the loan doesn't have a lot of fees, this is a good source of money for people who don't want to move.
How are homeowners doing when it comes to creating equity in their homes?
Creation of equity is a function of paying down a mortgage as well as the price appreciation in a home over time. So equity is created by the market as well as the person paying money into their home. I've argued for years that borrowing to improve your home is one of the best uses of home equity lending in that it improves the value of the home if the improvement is well done. And it is less risky for the lender, because when you improve your home, you improve the value of the loan collateral.
Why should a homeowner borrow?
Home equities today are used for far more than home improvement. People use them for buying a car instead of taking out auto loans; sending the kids to school and paying for room and board; for taking vacations and additional luxury items, or anything the heart desires.
I think it's a very good thing. If you've got the equity available and you want to borrow some of it, I say go for it. It's tax deductible. And, you're taking cash out of a nonliquid asset. However, home equity borrowing is a good thing depending on the person.
What about home equity borrowing to consolidate debt?
It's a great idea to use home equity to consolidate debt, but with the caution that the borrowers don't run their cards up again. Otherwise, they've used up the value in the home and they're still in debt.
Yes, you're putting your house on the line, but if you didn't pay your credit card, you could be thrown into involuntary bankruptcy, so there's still risk there.
What trends have you observed?
Home equity lending took off dramatically in 1986 with changes in tax codes and has continued to increase since then. One thing that has changed over the last two decades is that people are able to borrow 100 percent and at one time lenders were going up to 110 percent - borrowing on future equity. Many lenders have gone back on that. We have seen a huge increase in the percentage of equity people are borrowing and lenders are willing to lend. The cutbacks are due to foreclosures first, bankruptcies second. Lenders have become more cautious over the last year.