Lesson Learned: Home Equity Isn’t a Piggy Bank
Home equity loans were once commonly used as a method to make large purchases or to consolidate debt into a lower interest rate loan that is usually tax deductible. Back when home values skyrocketed many people tapped into their home equity to get their hands on some cash without applying for a traditional loan. Many lenders were granting equity loans at a quick rate, and many of them also loosened their lending standards to keep up with the applicants who found themselves knee deep in home equity.
Borrowers obtained home equity loans based on their newly inflated home values. They used the loans to consolidate debt, do home improvements, or even to take a luxury vacation that they may not have been able to afford otherwise. Some borrowers obtained home equity lines of credit and just used the funds sporadically as needed, sometimes making impulse purchases that they should not have made.
What happened to these borrowers when home values started plummeting? Although some of the homeowners borrowed within their financial means, many of them borrowed the maximum amounts offered by lenders. When their homes lost value and suddenly they owed more than the homes were worth, they found themselves upside down in their loans.
The lesson learned in all this mess is that home equity is not a piggy bank to be used for luxury purchases. It is one thing to tap into your home equity to make necessary home repairs, but it’s another thing entirely to borrow against your home’s equity in order to buy a set of jet skis or to take your dream vacation. When you use home equity to make frivolous purchases, you’re putting your home at risk.
Consider obtaining a home equity loan when you have no other options that will work. It’s far better to put cosmetic home improvements on hold until you have the money to pay for them than it is to use your home equity to finance them. As far as using home equity funds for a frivolous expense, such as a boat purchase or for an expensive piece of jewelry, it’s just not a good idea. The equity in your home is not free money. Instead, it’s an asset that should only be used when necessary.
July 8th, 2009 at 6:43 pm
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