New York real estate queen Barbara Corcoran once parlayed a $1,000 loan from a boyfriend into The Corcoran Group, a Manhattan real estate agency with 45 offices, 2,150 sales agents and employees, and an almost unfathomable $5 billion in closings last year.
Did you know she once used a home equity loan to stay afloat?
Bankrate connected with the effervescent “Today” show real estate correspondent to get the lowdown on the prudent — and imprudent — uses of home equity loans and lines of credit.
How have you used home equity?
I’ve only used it once. In 1988, I remember I got 110 percent financing from a very friendly mortgage broker on a country home, a renovated school house in Pawling, N.Y., and I used that money to float my business because I was going to go down. It was either that or sell the house, and that would have broken my heart. The money did float the business for about seven or eight months, I drained it right down, and I also paid for the mortgage with it, but it saved my business. I only did it because Citibank, at the time, had a credit line for me that I never used, and then when I needed it and pulled it, they closed it down — the first $10,000, BOOM! I thought credit lines were there for the trouble times; that was an interesting business lesson. But then my good old house saved the day. I still have it. I was able to pay off the entire mortgage on it two years later because the business was doing so well, so the business returned the compliment, I guess.
What is the biggest misunderstanding about home equity loans?
I think most people only think of it as when you’re really desperate. It’s almost sacrilegious to tap into that before you’re ready to sell your house. So I think it has a negative connotation in most people’s minds. I think most people assume that it ends in trouble, and for many people it does; it depends upon what people use it for.
What are the best uses of an equity loan or line of
I know two couples where the husband lost his job, and I think the best use of it is as an insurance policy to bridge the gap in a job loss. I think that’s the single best use. The second best use, I would say, is for college tuitions, because it’s very hard to accumulate that kind of cash for your kid. For one of these couples, it made the difference between the kid going to a great school that they qualified for and going to a state college. I thought that was a great use of it. And the third best use is for home improvement — if someone is tasteful. I’ve seen many people use it for home improvement without the right taste level and it doesn’t improve the value of the home. It depends on the taste level whether that’s wise.
And the worst uses?
I have one brother-in-law who really has used his home equity line as an ATM machine, for frivolous expenses. And probably the absolute worst use of it, and many people justify this, is to pay off credit card debt. There’s nothing wrong with it if you use the left brain because it is roughly half the interest rate than what the credit cards are going to cost you; you can consolidate and get one bill at half the interest rate, my God, who wouldn’t do it? But most people who use it in that fashion really, in short order, feel they are credit card free and they run them up again. I never think that’s a good use of it, even though it sounds like it’s a good use of it.
We often hear them sold as a good way to pay catastrophic medical expenses. What’s your take on that?
Let me ask you: Do people really do that? In all of my speeches, all the people I talk to, I’ve never had anyone raise that. Is that an urban myth? I’ve just never met anyone who has done that. I’m not sure that’s really true. Calamities are more apt to be covered, if anybody has any insurance.
Do you think there is more misuse of home equity today?
Yes. You know why? Because until recently with this soft (housing) bubble thing, people really felt that there was “fat” in the house and they had the right to use it. They just felt the sky was the limit and, my God, isn’t it a waste that we’re living as we are or our kid’s not going to college or we’re not paying off our credit cards or we’re not buying that plasma TV? And we have an equity of like $300,000 extra in our house that we’re not even using? So that kind of stinkin’ thinking goes on. I think the fat real estate values that rose by the week in the last five to seven years really lent themselves beautifully to people abusing the privilege. That said, that’s human nature.
Now that housing prices are leveling out, do you think people have put themselves in a bind by tapping their home equity?
Many people have, but most people have really used it judiciously. You know what? The lower the price of the house, honestly, the more apt people were to use it out of the extremes, either dire need or frivolous expenses. I think you tend to see the extremes in the lower-priced houses. And I think if you checked the foreclosure rates, you’ll find that the foreclosure rates are typically much higher in the lower-priced areas than they are in the higher-priced areas. That’s where you get the most abuse. You also get the most scams in terms of the mortgages that people sign up for in the first place, usury rates, things like that. On the upper end of the marketplace, you get more bridging the gap for job loss or college tuition.