Getting Your Financial Ducks In A Row Rotating Header Image

Home Equity is Not a License to Spend

vacation homeMany homeowners find themselves in a beneficial position a few or many years into their mortgage. As their payments continue, their mortgage balance gradually lessens and generally their home equity increases.

It may be tempting to view this increase in equity as a license to spend. In other words, individuals may be tempted to start spending on wants versus needs and no longer delay gratification.

A few arguments can be made in favor of using your homes equity in order to make purchases. Such arguments include home remodels, purchasing vehicles, taking vacations, and paying for college. Additionally, some may argue that if interest rates are low, one could use home equity and invest in the stock market – profiting from the spread of market gains and the loan interest. Further augmenting these arguments is the fact that the interest on a home equity loan may be tax deductible.

Let me give a few arguments against using your home’s equity to make purchases. Regarding home improvements – why not save the money needed to make the improvements without a loan? These improvements can be done over time and do not diminish your net worth. The same argument is true with vehicles and vacations. Save money to purchase vehicles (preferably used) and take vacations. And if you can’t afford the vehicle or vacation – don’t purchase it. Or better yet, think of a way to find cheaper transportation (bike, carpool, public) or take a cheaper vacation.

To combat the argument of using home equity to invest in the stock market, let me make one thing clear – market returns are not guaranteed. While there is the possibility to earn more that the interest rate on the equity loan, there is also the risk of losing money, yet still owing on the loan.

It makes very little sense to acquire debt, just to acquire more stuff. Additionally, real estate prices/valuations are no guarantee. A home owner could take out a home equity loan, and see the market value of the home drop (just like the stock market). In which case the home owner is upside down – owing more money that the home is worth. This can create dire circumstances should the home need to be sold.

One argument I do favor regarding home equity is when considering a reverse mortgage. Reverse mortgages allow homeowners to tap the equity in their home in order to supplement their retirement income. While reverse mortgages may be ideal for some, it’s important to do your due diligence. More information on reverse mortgages can be found here.

I think the key point is to delay gratification, and working diligently to keep increasing net worth. Use home equity to build and increase wealth, not diminish it.

One Comment

  1. Home equity are those holy things in life. I agree that it is better to buy things little by little with cash money or credit card. I see a reverse mortgage also as a last chance in the case, if you have to get money for instance for some urgent medical bill.

Get involved!

%d bloggers like this: