Most home owners would not dream of selling their bedroom or the bathtub in their bathroom, but when they take out the equity in their homes, they are doing just that.
One of the most revered goals in our great nation has been the promise of home ownership. People taking the plunge and little by little building equity over the years so they can have a retirement nest egg is the American dream. Markets go up and markets go down, but until someone figures out how to make more land, real estate is still one of the best economic choices most of us can make.
Some national lenders are dramatically scaling back their home equity loan programs (reducing the available credit or just downright canceling HELOCS). They have their reasons for doing this, but we should take notice, and know better if we can avoid it.
As a realtor, one of the most heartbreaking things is when sellers have to bring money to close. Yes, the downturn is a piece of that, but an all too common cause is when people take the equity out of their homes leaving them with far less financial strength when they do eventually sell.
I certainly am not passing summary judgment of people that leverage their homes. Not everyone uses their home as an ATM or as a supplemental form of income. Many people find themselves with financial difficulties that leave them facing poor options. This is not for you, the troubled homeowner. This is for you, the homeowner that can take out the equity but shouldn’t.
If you can avoid home equity loans, avoid them. Try to remember the advice our parents gave us (don’t buy it if you can’t pay for it). As an adult, I certainly don’t like to hear that I have to wait for what I want, but that medicine is exactly what I need sometimes. I’m not particularly old fashioned, but saving up until I can buy something feels fundamentally right.
If you must take out a home equity loan, understand the market; you could get caught selling in a down cycle and not have the equity you thought.
For many of us, our home is our future. Make sure you understand the equity you have, the interest you’re paying, and the compound cost to you of a home equity loan. Never use a long term investment (a home) to fund a short lived commodity (a car or a boat).
If you can help it, don’t sell parts of your home today. That will come to haunt you tomorrow and leave with you with fewer choices. Thanks for the advice mom. I should have heeded it more early on, myself.
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