Do you think taking out a home equity loan can ever be a positive thing?
I just don't see many positive uses from it. The negative far outweighs the positive. The thing is, the American consumer's equity in their home is usually their greatest asset and when they start tapping that because everyone at the bank is telling them what a great idea it is, when they turn their biggest asset into their greatest liability, that's just not a positive thing. Over a couple of decades of someone's financial life they need to be moving in the other direction. It's the last great bastion of consumer wealth and it's pretty well going away.
“Home equity is the last great bastion of consumer wealth and it's pretty well going away.”
A couple of years ago when the housing market was roaring and interest rates were so low, all you heard about were home equity loans.
Right. And what we're seeing now, with the market softening up in particular regions, I'm getting a lot of calls from people who moved their credit card debt over to a home equity loan. They weren't so stupid as to take a loan worth 125 percent of their home, they just borrowed 100 percent. And now, the house isn't worth that.
So, we get into the same situation as with our cars where we owe more on them than they're worth and, I tell you, being stuck upside down in a car loan is a bad idea, but being stuck in a house that you owe more on than it's worth can take you down financially.
Do you have any worst-case horror stories that you've counseled?
I think the worst cases that we've seen are when unscrupulous lenders get involved, especially with the subprime market stuff. I talked to a widow who called in not long ago who was talked into debt consolidation by some guy because she would just have one payment. Now, how appealing is that? However, all she consolidated were medical bills that didn't have an interest rate and now he's charging her 14 percent. But, she only has one payment!
Really, I wanted to grab that guy around the neck. Poor lady, it was just sad because she thought she had done something smart, and she hadn't. That's one of the worst ones.
Other sad cases are from the people who borrowed most of the value or the full value of their house and then something changes in their lives. They get laid off or transferred -- or it could be something positive, they get a raise and want to buy another house -- but they can't get out of the house. And again, with this market that's been softening over the past six months, particularly in regional areas, we're seeing more and more folks that I'm having to teach about short sales and negotiating with their lender because they're not going to be able to pay them. A short sale is the mortgage holder accepting less than is owed as a settlement and releasing the title to a new buyer. They would do this due to a soft local real estate market and, of course, the seller gets no proceeds from the sale.
The problem is we cycle in our economy. I'm old enough that I've seen a couple of them. I got my real estate license in 1978 and I lived through the high interest rates of the early '80s. There's always this new batch of people with a gold rush mentality. Nothing they can do is wrong and real estate values will always be on the rise. After you have mass hysteria like that you get a market correction that teaches the next generation the lesson of cycles. It's really sad because it puts strain on a marriage; it affects whether or not their kid gets to go to college or where their kid goes to college. There are real life implications of this stuff that's saddening.
What advice would you give to someone considering a home equity loan?
Really, let's address a few of these things. You don't need to go on vacation unless you can pay for it. If you have a home repair, in almost every case, that home repair is not an emergency situation. We put a nice patio with a screened-in porch on the back of our home a couple of years ago. We just saved up and paid for it, same with the vacation -- Grandma's old-fashioned way.