Financial Literacy 2007 - Home equity
Barbara Corcoran
home equity
Interview: Barbara Corcoran

q_v2.gif And the worst uses?

a_v2.gif 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.

q_v2.gif We often hear them sold as a good way to pay catastrophic medical expenses. What's your take on that?

a_v2.gif 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.

q_v2.gif Do you think there is more misuse of home equity today?

a_v2.gif 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.

q_v2.gifNow that housing prices are leveling out, do you think people have put themselves in a bind by tapping their home equity?

a_v2.gif 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.

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