When 74% of homeowners can be wrong... The boom of home equity lines of credit for all of the wrong reasons
Bottom Line: A recent Bankrate.com survey showed that one decade after the bottom fell out of the housing market triggering the financial crisis – most Americans are way too comfortable using their homes to fulfill their short-term financial desires. At least in my view.
The survey said..."Good" reasons to borrow from your home's equity:
- 74% Home improvements or repairs
- 44% Debt consolidation
- 31% To pay tuition or other educational expenses
- 15% To keep up with regular household bills
- 12% To make other investments
There were a number of other answers, for good use of home equity under 10% including vacations and plastic surgery. Yikes. Anyway, here’s the deal. Unless you have the financial ability to pay the home equity loan off if needed and are simply using it for flexibility as part of your financial planning – it's a terrible idea. It being all of these reasons.
The average person is faced with significant, negative financial adversity an average of once every eight years. On a thirty-year mortgage, if you paid it to completion, you’d be facing major financial challenges an average of 3-4 times along the way. How important is that kitchen remodel when you can’t afford to make your mortgage and home equity monthly payments? The most important lesson that could’ve been learned from the housing crisis is that your home is first and foremost the roof over your family’s head. Anything you do to leverage the risk of losing it is a risk not worth taking. For this reason, I differ strongly with many financial advisers on debt consolidation uses as well. Many will say that if you can payoff higher interest loans of credit cards with a home equity line or a refi it makes sense to do so. I couldn’t disagree more.
In Florida, with our homestead protections that are among the strongest in the country, the only way you’ll lose your home is if you don’t make your mortgage payments and/or property tax payments (or you’re Bernie Madoff – please don’t be like that guy). Even in bankruptcy you get to keep your home as long as you make those payments. If you used your home to payoff credit cards and then lost your job and couldn’t make a home equity payment where would you be? For these reasons it’s best to use my “Third” plan for saving for extras while investing and to pay down debt. Patience is a virtue and it could be what saves your home the next time “life” happens out of left-field.