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Home Equity
Loans-The Good,
Bad, and the Ugly
The home equity
line/loan is a great tool to use in financial emergencies, make home
improvements, pay medical bills, pay for major expenses, or
consolidate debt. If it is misused it can bring financial turmoil
into your household. Let's look at a few examples.
A $15,000 home
equity loan was made to consolidate high interest debt in a like
amount. When the check was issued the borrowers had good intentions
but got sidetracked. The temptation was too much and they spent it
on a vacation and furniture. Now they owe $30,000 instead of
$15,000. They are at serious risk of losing their house. Or look at
the same scenario where they did pay off their high interest credit
cards only to charge, charge, and charge some more so they are back
where they started only with an extra $15,000 debt burden.
A home
appreciated by $50,000 in 5 years in a booming housing market. Not
an unlikely situation. The borrowers took out a home equity loan for
$15,000. Six months later the husband lost his job because of a
steep downturn in the economy which caused the housing market to
deteriorate causing the value of their home to decline by $30,000.
Remember Sir Isaac Newton-the law of gravity-what goes up must come
down.
The temptation
to spend long term wealth and hard earned equity in your home on
short term and short sighted needs for some is overwhelming. In
today's society where credit card offers come at you with warp speed
and it is so easy to just charge anything, it takes a fair amount of
willpower and restraint to not fall into the trap. A lot of money is
being spent on marketing to show Americans that a home equity loan
is the way to solve the high interest credit card debt problem-so
much so that home equity has replaced credit card debt as the
biggest sector of personal debt in the country.
The feeling that
with home and stock appreciation comes less worry about where the
money will come from to pay the bills. This feeling of prosperity
can be a false one for sure. Studies have shown that as home equity
loans pay off those credit card bills the spending continues putting
Americans more and more in debt.
There must be a
change in spending habits in order to make it work. If you can't
sleep at night worrying about your bills that is a sure sign of
trouble. |
