Disturbing New Trend Puts Home Owners at Risk

tootsie-hitI am disturbed by a new trend. I am disturbed that so many home owners haven’t learned from the mistakes of the past and are making those same financial blunders again.

I’m talking about people using their homes like a piggy bank. Like children in a candy store, they can’t wait to spend their property value on pretty new kitchens, hardwood floors, sunken tubs, sun rooms, and other desires.

This is exactly what happened in the boom years of 2004 to 2006. Home owners were doing cash-out refinances and taking second mortgages called a Home Equity Line of Credit (HELOC) in order to fund wants. Then to their shock and dismay, when values declined, they had no equity left. Their piggy banks were empty.  What’s more, when their incomes declined, they could no longer afford the extra payment on the second mortgage.

Now that values have risen in many parts of the country, new stats show that taking cash out is hot again. Home owners are signing for HELOCs and spending their equity on home improvements.

They justify their desires by saying the improvements will increase the value of their homes. That’s a good line that loan officers use in order to sell loans. Unfortunately, the facts don’t support it. Real figures show that what people spend remodeling their kitchen is more than the increased value of their home. The same goes for the other home improvements.

Reality Check: A remodeled bathroom or kitchen is not “an investment.” You don’t get back more money than you put in.

When you can afford to pay cash for an upgrade, then go for it. By all means, enjoy the luxury. But be smart. Don’t repeat the regrettable mistakes of the past. Don’t take out a loan to buy something that is a want and not a need.

Greed has been defined as having an unrealistic expectation. It is unrealistic to think you can take your equity, spend it, then pay interest to the bank that enabled you to take the loan, and come out ahead.

Better to be patient and prudent by saving up cash until you can truly afford that pretty new upgrade you want.

 

One response

  1. Well Said!! I love it…

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