Are you using the equity from your home to purchase everyday things?This is a dangerous trend growing more popular every month asmillions of Americans tap into the value of their home to fund alifestyle.
How many times have you heard the saying "Your home is the bestinvestment you'll ever make"? How many times have you also heard thatyour home will be the most valuable asset you will ever own?
Both of these are as true, if not truer, today than at any time inthe past. Unfortunately, spend happy Americans are looking at theirhome as just another type of ATM, and they are visiting it way tooften. These homeowners are using money borrowed against their houseto finance expensive vacations, new vehicles, even daily visits tothe corner coffee shop.
Our parents wouldn't think of buying furniture with money borrowedagainst their home. So why is this form of borrowing becoming sopopular? Three events have converged to create this dangerous trend.
1. Low interest rates. The past two or three years have seeninterest rates unheard of since the 1950's. These low rates encouragepeople to think they have basically free money to spend however theywant to.
2. Real estate value increases. The Office of Federal HousingEnterprise Oversight (OFHEO) reports that their data shows marketvalue of the average home increased nearly 13% in 2004. That is morethan any time in the last 25 years. Some areas saw the value of homesdouble in less than 5 years.
This increase in value is perceived by some people as being a bonus -they didn't have to work for the money, so it doesn't cost themanything. They are right about it not costing them anything, exceptthey forgot that when they borrow money it has to be paid back. Thatis when the true cost of the debt appears!
The U.S. Department of Commerce reports in 2003 nearly half of the$8 trillion in outstanding mortgage debt was in new mortgageoriginations. This doesn't mean home equity loans are necessarily badideas. Using equity in your home to remodel and make additions canresult in solid returns. Even debt consolidation can be a goodchoice, provided you have solved the problem that caused the debt inthe first place.
3. Ease of borrowing. Twenty years ago, lenders wouldn't think ofgiving you a loan, even against your home, if it would cause yourequity to become less than 20%. Some insisted in a percentage closerto 50% equity. Those days are long over.
Today you can go online and find a lender willing to give you a loanequal to 125% the value of your house! If you have a credit ofrepayment, hold a job, and are still breathing you can probably finda lender willing to let you borrow against your home equity.
The risk created by the convergence of these three factors is theloss of your safety net. As people buy homes at the top end of theirrange and base mortgages on two incomes something has to give.This "something" has been their savings. Putting aside part of eachpaycheck has become the low priority in the pile of demands barraginga family's income.
Data released by the Employee Benefit Research Institute reportsnearly 45% of all workers hold assets of less than $25,000 (excludingtheir home). Barely 67% of today's workers are currently saving moneyin a 401(k) or some investment program, according to a ThriventFinancial Survey.
Does any of this sound familiar to you? The looming debt ofmortgage, college, and credit card can seem overwhelming. How can youtip your financial life back into favoring a secure future foryourself and family?
Here are five steps to escape the home equity debt trap.
1. Keep track of expenses. Keep a spending record of everything youspend for one month. The next month, do it again, and the next monthtoo, until you see areas of spending you can cut back and use thatmoney to fund your lifestyle goals, i.e. vacation, college, or a newlawn mower.
2. Create realistic debt reduction goals. List all of your debtswith interest rates, outstanding balances and minimum payments.Create a plan to pay down the debt, preferably pay the same setamount each month no matter what the minimums are. Anything extra youpay should go to the smallest debt first. When a credit card is paidoff, get rid of it. Perhaps a small reward like a special meal when agoal is reached will help keep you motivated.
3. Preserve your home equity. Having home equity untapped in yourhouse can provide a level of reassurance. Making wise uses of thisequity will help you to not exhaust it. When you do tap into yourhome equity, make sure it is not used to pay for daily living.
4. Pay as little debt interest as possible. Consolidation of debtsinto low, or no interest loans i.e. credit cards, is acceptable aslong as no new debt is acquired and you are paying down your debtseach month.
5. Start saving regularly. A fund of money for emergencies will helpavoid debt when life throws you a problem. If you consider saving a"non-optional" bill each month, you will develop the find habit ofsaving. The result is a growing asset base.
The end result of taking these five steps? A minimal-debt life spentliving in an affordable home of your own.
Roger Sorensen
America's Financial Guide can be found at ==>http://www.Slave2Work.com Subscribe to Money Basics via http://www.slave2work.com/ezine.html
Slave2Work.com - Are you ready for financial freedom?