Things I’ve been reading and seeing on tv lately have got me wondering - are people in the US encouraged to spend their home equity (the value of your house that you’ve actually paid for versus what you still owe on it)? To take out loans based on their home equity? To just plain flat-out spend an amount of money equal to their home equity, or as much as the banks will give them? It seems like an obvious question (of course not - you don’t just spend your home equity!), but I’m starting to question my assumption that people don’t spend their home equity.
Then I question my second assumption - that spending your home equity is a bad thing. You can’t take it with you when you die - making your home equity more liquid and enjoying it while you’re alive - maybe that’s not the worst idea ever.
Are you talking about a reverse mortgage? Where someone essentially sells their house back to the bank (or donates it to a non-profit), in return for monthly payments (essentially an annuity)?
Encouraged by who? By second lien lenders? By reverse mortgage lenders? By your friends and family? By the government?
I’m sure someone out there is encouraging US homeowners to do this, just like there are people out there encouraging Americans to use heroin also.
The risk associated with the spending your home equity before you die, is that we aren’t very good at predicting when people are going to die. Generally mortality rates have been increasing beyond expectations for the last several decades. This has caused all sorts of problems for administrators of defined benefit pension plans and for governments that manage social security retirement benefits. There aren’t as much funds available as promised because people are living longer.
Every bank website will have an ad/link on their homepage to thier home equity loan or line of credit page. So encouraged by the banks? Absolutely. Encouraged by financial advisers? Probably only in certain circumstances - an addition that increases the value of the house is something that a home equity loan would probably make sense for. Hookers and blow, not so much.
It’s encouraged by the government in the sense that interest on a home equity loan is tax deductible.
I’ve used one myself to make a major repair on a house. I could have paid for the repair by tapping into my savings but at the time interest rates were so low that after the tax deduction was taken into account it was cheaper to borrow the money than to sell off investments.
Not a reverse mortgage so much (although it would definitely qualify as dipping into your home equity); I was thinking more along the lines of using your home equity for easing your current financial burden, like taking out a loan on your home equity to pay off a credit card.
The government, general societal attitude.
The interest on home equity loans is tax deductible? That’s definitely encouraged by the government, then.
There are some rules about deducting interest on a home equity loan. If it’s used to repair/renovate/improve the house, it’s fully deductible. If it’s used for something else, like education or a vacation or hookers & blow, there’s a limit as to how much interest is deductible.
I remember when a “home equity loan” was called “a second mortgage”.
It’s always been an option for certain big ticket items. For example, if a tornado sucks the roof off your house using equity to help pay for repairs makes sense, as your investment is useless without repairs. Paying for advanced education might also make sense, because the idea is that down the line that will pay off in more income.
Taking one out to pay for credit card debt acquired because you have a shopping addiction or can’t stop betting on the ponies is a Bad Idea.
Do banks encourage such loans? Yes, they do. But they don’t compel anyone to take one out, either.
I don’t see the harm in it, if you’re young enough and you’re using it to pay off a one-time debt. The interest rate is lower than a credit card or an ordinary line of credit. You just have to avoid doing it repeatedly and/or doing it to pay for frivolous stuff.
I was chatting with my neighbor a few months ago by the mailbox and she said “boy, I sure do hate all this junk mail for mortgage life insurance and all that other stuff. They make it look so official and I never know if I have to do it or if I’m getting scammed.” “Gosh, you’ve lived here for 40 years, I don’t suppose you even * have* a mortgage anymore.” She gave me a dirty ‘mind your own business’ look so I changed the subject.
I was very curious though, so I went to the county recorder’s website and discovered she had just completed a cash-back refinance for more than I could ever imagine her home is worth. There were records of a refinance every few years for as long as the web site went back.
I don’t think that is uncommon at all, although I do feel it’s a terrible shame to pay a mortgage and maintain a home for effectively your entire life and not actually own any part of it.
Meh. I have a HELOC, and have never borrowed money against it. I probably would have had to make a big stink not to get one. I really don’t see the down side of having a $0 balance HELOC.
One of the major causes of the recent housing crisis was people refinancing their mortgages, getting money out by increasing the mortgage. I know people who actually thought they were getting “free money”.
Their payments went up, of course. But they’d make some payments using part of their new money and then refinance again when that ran out.
And when things went kaput, there goes the house.
The banks really, really encouraged people to do this. Their game was to re-sell these risky mortgages to others, lying of course about the risk.
But if you refinance the whole mortgage, then all the interest is deductible.
We’ve refinanced twice. Once was because mortgage rates had dropped so much since we’d purchased that we saved money by refinancing, but we did take some money out to pay off some debts. (They weren’t student loans, but having those debts was closely related to being in grad school.) The other refinance was to take money out to finance a significant remodel. Based on current housing prices in our neighborhood, I think we currently have about $250-$275k in equity, so I don’t really feel like we’re skating on thin ice over here.
Most frequently occurring natural disasters are coverage exclusions on homeowners’ insurance policies nowadays. You have to buy a separate rider for them (and in some cases you simply can’t get them covered at all.) Mortgage lenders typically only require basic homeowners’ insurance policies (covering fire, “normal” weather damage, theft, and the like.)
Here in Florida we (personally) have separate riders for flood and sinkhole damage. I think we also needed a separate rider (subsidized by the state) for hurricane damage.
