Right before the Great Recession, lenders, main stream and fly-by-night, urged us to “tap the equity in your home for what you want today”.
California home values were rising. Credit was easy. And we always want something more, don’t we.
We need to remember those days, because those sales pitches are back.
Back on the radio and back on line.
And they are just as short-sighted and dangerous as they were 10 years ago.
Dangerous to the homeowner who drains the equity in his home for cash to spend now.
And dangerous to an economy whose homeowners are stretched ever thinner.
The home equity fallacy
The lender’s pitch revolves around the idea that equity in a home is wasted if you aren’t using it. As in, using it as collateral for a loan.
Think of all the variations of the loan sales pitch
- unlock the equity in your home.
- finance a vacation,
- Pay off credit card debt.
There is something superficially comforting about borrowing money against your house.
If you spend cash you’ve saved, the cash is gone, your bank balance is visibly less. The consequence of spending is obvious.
Whereas, if you tap the equity in your house (another comforting metaphor) you still have the house. It appears that little has changed and you now have whatever it is the loan proceeds bought you.
Seems like a win-win.
What lenders don’t tell you
A home equity loan puts your house at risk. I am always amazed by the skewed thinking of people about home equity lines of credit.
They see HELOCs as somehow fundamentally different than the first mortgage. They don’t see that both the mortgage and the home equity line diminish the equity in their home. Both expose the home to a foreclosure sale.
If a bump in your financial life makes it impossible to pay the loan, you can lose your house altogether. Foreclosure wipes out whatever equity remains in the house and leaves you without shelter, which is the primary purpose of a house in the first place.
A 15 to 30 year secured line of credit has you paying for decades for that vacation or new car, or whatever.
There are undoubtedly purposes for which a home equity loan is a sound choice, but sound choices are hard to make when surrounded home equity line of credit sales pitches promoting fuzzy thinking. The mortgage broker gets his commission whether or not you keep your house.
How are you going to retire?
Remember the stories from the mid 20th century when families would celebrate paying off their mortgage altogether. They’d have a party to burn the mortgage.
Not today. We seem to be hurtling toward old age still paying for our houses. And mortgage debt that was doable when you’re working is a millstone around your neck if you’re living on a fixed income.
The home equity loan just adds to the monthly outgo, when less is coming in.
Your house may be a big item on your personal balance sheet, but it isn’t interchangeable with your piggy bank.
Let the equity sit there, quietly plumping up your net worth.
