Friday, August 10, 2012

Down with Home Equity Loans

Driving past a local bank recently, I was surprised (perhaps even mildly shocked) to see a sign reading: “Put your home equity to work for you.”  What could they be thinking?  Well, the banks are thinking that they can make a loan and collect fees and interest.  The customers are likely not thinking very clearly.

There are still so many people with zero or even negative home equity, owing more than the value of the house, “upside down” or “under water” from the Great Recession.  They believed the line the banks (and realtors) fed them about putting almost nothing down and counting on the market to push the prices up steadily.  When the bubble burst they were left holding the bag.  Some walked away and some were evicted but many lost their houses.

Now, before the economy has fully recovered, banks are at it again.  The advice you get from bankers, realtors and financial advisors serves their purposes,  not yours.  It produces interest, fees and commissions.  A house is not a good investment.  It’s usually hard to sell, so you can’t get your money out right away for emergencies.  It doesn’t always appreciate.  The tax deduction is less of a benefit than most people understand (see The Myth of Home Equity, March 5, 2012).  The government only helps you pay a portion of your interest and you still pay more than you borrow.  Finally, when you do sell it, you still need some place to live!  That means you have to buy another house that has been going through the same market changes.  Unless you are a speculator, timing the market, or willing to put a lot of time and energy into a fixer-upper, you have to be very lucky to come out ahead.

Those advisors continue to call it an investment, buy a house bigger than you need (paying interest and sales commissions) and count it as retirement savings or keep cashing in your home equity to invest in the stock market (paying more sales fees) where it will grow more quickly or, worst of all, take the money out and reward yourself with a nice vacation – “You owe it to yourself; you’ve worked so hard, etc.”

Well call me old fashioned, but my advice is build up that equity and don’t even think of it as equity or an investment.  Think of it as having a roof over your head that no one can take away from you.  When the market goes up, good.  When it goes down, too bad, but at least you don’t have a bank or collection agency knocking on the door.  You’ll never be able to afford your neighbors' luxuries or exotic vacations, but you won’t have their headaches either.  This behavior is not possible for everyone.  I understand there are exceptions and personal situations.  But when you drive by the sign tempting you to “Tap your home equity,” I think you will be a lot happier in the long run if you just keep driving.

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