Your home provides shelter and warmth. Your ATM machine provides easy access to cash. If anything should be learned from the recent housing market crisis, it's that the two must never be confused.
Those who don't learn from history are condemned to repeat it. Let's hope this maxim doesn't apply to the housing market.
As a housing market turn-around begins to peek through the dark clouds of the real estate market, chances are good that people will once again start tapping their home equity. Rates are extremely low, and banks are looking to lend out second mortgage products, such as the home equity line of credit (HELOC). Home improvement specialists are also hungry for work, and offering their services at bargain basement prices.
Despite the glut of cheap home improvement projects on the market, it may be more prudent to resist temptation and work towards building up your home equity.
Home improvement can be tempting
Why do people feel the need to treat their homes like an ATM machine? There's a simple explanation: Lack of financial discipline. For many people, the American Dream is to purchase a home. All it requires is a down payment and a home mortgage. If you're fortunate enough, your house will appreciate over time, and you'll build up home equity in your property.
Traditionally, banks have provided the means for consumers to tap their home equity by offering a second mortgage in addition to a first one. It can be in the form of a home equity loan or a HELOC. In essence, the bank allows you to access your home equity, provided that you pay them interest to do it.
Trouble in home improvement city
The problem with tapping your home equity, even if you're using it to improve the value of your home, is that the market could turn on you. Your home price could plunge dramatically, as it did after the recent housing bubble burst, and you could find yourself owing more than your house is worth. Many people fell into that trap during the recent crisis, and it's resulted in thousands of foreclosures.
The big question: Have people learned their lesson? If they have, the next home purchase they make won't involve running out for a second mortgage the day after they've closed on the first. Instead, homeowners should try a more traditional method of financing their home improvements-namely, with disciplined saving. They should choose to budget their money carefully and live within their means. They must provide themselves with enough equity in their home so that they're protected in the event of another housing crisis.
A home is an investment, but it doesn't necessarily work like stocks or bonds. You can spend stocks and bonds in their entirety with no consequence. If you spend all your home equity, however, you're jeopardizing your shelter. This is a lesson that wasn't understood by countless homeowners during the hey-day of the housing market. Hopefully, people won't make the same mistake twice.