Don't Rely on Home Equity for Cash

Here's a piece from Money Central that says you shouldn't rely on your home equity for cash. The article talks about home-equity loans and gives this warning:

Thinking about tapping into your equity for a loan? That could be a dangerous move. In a financial crisis, you could be forced to sell your home or wind up in foreclosure.

The piece includes this funny bit from Dave Ramsey:

Dave Ramsey, a radio talk-show host and the author of "The Total Money Makeover," points out that the banking industry calls home-equity loans "HELs" for short. "My experience tells me they simply left off an 'L,' " he says. "These loans are dangerous, and an unbelievable amount of them end in foreclosure."

Ha!

Of course my thoughts on this mirror Ramsey's, but no one wants to read what I think about evil home loans (or even My Formula for Buying a House or Paying Off Your House Early). So I'll just be quiet and let all you comment how great you think HELs are -- something I'm sure will happen. ;-)

By the way, I want to clarify my thoughts on paying off your house early. I do not advocate you putting every extra dollar to pay off your house early and then have 90% of your net worth tied up in an illiquid asset. What I do suggest is living below your means, saving and investing, and also paying off debt (including your mortgage) -- all at roughly the same time. If you can't afford to do that, then take the appropriate actions one step at a time -- same in your 401k to get the full employer match, pay off credit card debt, save, and then pay off your mortgage.

Even though we've had our house paid off for several years, it's never been more than a third of our net worth. We simply lived far enough below our means to be able to save and pay off the mortgage at the same time.

For more thoughts on this subject, see The 10 Best Money Moves You Can Make.

Comments

[efipo.com]

I am advocate of never paying your house off early. If I could qualify for a 100 year fixed rate loan, I would gladly accept it. I believe real estate should be leveraged, and save the money and invest it somewhere else like: having a huge "rainy day" fund, IRA or buying more real estate.

One of the biggest problems with putting all your money in real estate is you have no immediate cash. I have read a ton of stories about people that put every single dime into their house, then they lose their jobs and end up having to sell their property just to have money for food.

[FMF]

That assumes you put ALL your money in your house -- something I don't advocate.

I suggest people pay off their homes after fully funding an emergency fund as well as saving for other needs as well. That's how it worked for me.

[muckdog]

I'd never pay it off, either. But that runs contrary to what a lot of folks are trying to do. They have this image of "owning their home" and not having any mortgage payment when they retire.

But they'd be better off over the long term by saving and investing, while compounding their returns. The stock market returns a much higher rate than real estate over the long term.

Plus, who knows where one may want to live when they retire. People move a lot. Even though we may envision ourselves in a home forever, the reality is that we may want something else down the road.

[Skott]

I prefer to consider home equity just another form of diversification. No, you shouldn't put ALL of your savings into paying down your mortgage. Just like you should not put it all into a rainy day fund, mutual funds, or any single place. But after you've maxed out your tax-sheltered investment accounts, paying some extra on the mortgage make sense, IMO.