About five years ago, I switched from being a renter to being a homeowner. Now, I don't go a week without getting some kind of mail offer to refinance my mortgage, open a home equity line of credit (HELOC), or apply for a home equity loan.
Pay off your credit card debt with high interest! Reduce your monthly bills! Get a new car! Refinance and Get Cash Right Away! yell out the slogans that are written on the envelopes.
The letters inside tell me how easy it will be to "get the extra money you need NOW!" When they refinance a 30-year loan, they say there will be "no out-of-pocket costs."
Could I use extra money RIGHT NOW? I sure could! Who needs debt with high interest rates? No way, no how, not me! Buy a new car? I like that new Pontiac G6 I saw on TV. Maybe in a sleek colour like titanium with black trim?
"Home Sweet Home" is quickly being replaced by a new phrase in thousands of U.S. homes: "Home Sweet ATM." According to the most recent study by the Federal Reserve, 45 percent of homeowners who refinanced their mortgages took out cash and 74 percent made their mortgages last about six years longer. Only 17% cut down on the length of their loan by choosing a 15-year mortgage.
The Federal Reserve says that the amount Americans owe on home equity loans and lines of credit has more than doubled in the past six years and is now close to $766.2 billion.
If you're in your 40s and get a new 30-year loan, it will be paid off when you're in your 70s. Even if you pay down your principle and save a few years, you still might not own your home "free and clear" by the time you retire.
What happened to the time when your home was your nest egg and you only used it for things like a child's wedding or a medical emergency? Worst of all, many new homeowners are taking out new loans using the equity in their home.
Think twice before you use the equity in your home to pay off your credit card debt. If you already spend more than you can afford on your credit cards, what makes you think that will change if you get a loan or line of credit to pay them off? Many people get deeper in debt or have to file for bankruptcy because they couldn't stop charging up their cards again.
Before you use your home's equity, remember that your loan or HELOC is backed by your home. If you don't pay back the loan, you could lose your house even if you go bankrupt.
The best thing to do with your home equity is to make improvements that make your home more valuable. Some "hot" home improvements that can really pay off when it's time to sell are remodelling a kitchen or bathroom, adding an extra room, or making a master suite.
If your home is really your nest egg, use its equity wisely. Make sure it fits in with your overall plan and goals for your money. If not, you might be left with just the egg and no nest.
