Home Equity Loans ... Wise or Unwise?
Home Equity Loans
Over the past few years many Americans have established lines of
credit secured by the equity in their homes. This has allowed
them to expand their purchasing power while all too often not
saving even one dime. For marginal borrowers this can turn out
to be highly risky as it exposes these families to the loss of
their homes. Lenders tend to quickly change from best friend to
worst foe in times of financial crisis and need and will "take
it away if you can't pay".
Prior to mortgaging or refinancing a home one should consider
what the families finances would look like if one or more of the
family members living in the home lost their job or became
seriously ill. One should also consider the effects that a
declining housing market might have on your financial situation.
Yes, I know that housing prices world wide have been super
strong over the past several years. That is just the point. The
end of the super cycle may be near. Housing prices have
benefited greatly from the excessive liquidity provided by the
US Federal Reserve but that liquidity fountain can and will dry
up one day. Inflation is becoming more of a concern so perhaps
the well will run dry soon. Beware.
How long could you keep your home payments current if there was
a sudden unfortunate loss of family income or if your adjustable
rate mortgage quickly rose by 50% or more?
Even with the risk of refinancing or taking out a home equity
loan there are times when it may in fact be wise. Perhaps credit
card debt has gotten out of hand. You can get a home equity loan
at much lower rates, pay off the credit card debt, and lower
your monthly payments, perhaps as much as by 40-50%.
A word of warning, however. You must not run up your credit card
balances once again or you will end up in even worse financial
shape than you were to begin with. It would be far safer to
avoid temptation by cutting up your credit cards and using a
debit card instead.
There are other occassions when a home equity loan may be
justified. Perhaps you wish to start your own business and are
willing and able to take the risk that things may not work out
as you plan. A home equity loan will likely be the cheapest
source of start up capital around.
Perhaps you wish to purchase an existing business, one that
should earn you a good income for a long time to come. Again
your cheapest source of capital would likely be a home equity
loan.
In general, one should consider a home equity loan when the loan
proceeds are used to very likely improve ones financial
position. This would be a wise use of the loan proceeds.
One should use extreme caution in using a home equity loan to
purchase additional consumer goods, say a large expensive flat
screen TV set or a new SUV. The worst example of the use of a
home equity loan that I know of was a couple who took out a loan
in order to go to the Superbowl. Just think of how much that
Superbowl trip will really cost over the years as interest
payments are added in. What an awful short sighted financial
decision.
My advice. Use a home equity loan only to improve your financial
position or to raise funds in a true emergency situation. Using
a home equity loan to purchase things that will only lose value
is a misuse of the loan proceeds that could cost you what is
probably your most useful and valuable possession ... your home.