There’s no replacement for lost equity in your home. Long before the current foreclosure crisis, folks were already losing their homes, piece by piece, brick by brick. How many of us can really be called homeowners if the bank or mortgage company owns more than 90% of our home? Though many more Americans became home owners during the past few decades, they have in recent times been tapping deeply into their equity to pay for cars and college. And that means home ownership becomes as thin as the paper the deed is printed on.
A national bailout won’t help the lower to middle income homeowners that have relied on their homes for cash, who took advantage of rising home prices and treated their home as a piggy bank.
Home prices are slipping, and the truth of what we’ve been doing is now hitting us hard. As home values drop, the homeowner has even less equity in the home. And what is supposed to be our greatest asset becomes a burden instead. Instead of a savings account, we have a busted piggy bank.
As 2008 approaches, economists are predicting that the coming plunge in home equity will do many folks in. For the first time since the Fed began recording the data in 1945, people will owe more than they own. We’re going back to square one and beyond.
When you add to this the problem of ballooning interest rates and resets of monthly payments, the homeowner’s losing situation just gets worse. If we’d started with a fair sized down payment and higher interest rates, there would have been some cushion against declining prices.
In 2004 alone, homeowners drained $468.7 billion out of their homes through home equity loans or cash-out refinancing, according to a report by former Fed Chairman Alan Greenspan and Fed senior economist James Kennedy. 58% of that went to home improvements and personal spending, while credit card debt was paid off with 27 %. Fully one quarter of the home equity loans issued in 2005 and 2006 left homeowners with less than 10 percent of equity in their homes, according to the MBA.
Two types of loans use houses as collateral. The home equity loan is a close-ended loan on top of a mortgage. The equity line of credit is an open-ended loan. Some borrowers refinance for more than what is owed on the current mortgage and keep the difference in cash. Many people have very little savings to fall back on, and their total net worth is affected.
To treat your most valuable asset as a cash cow can be the most dangerous and impractical thing a home buyer can do. To gamble that housing prices will continue to rise so that the equity you take out will be eventually replenished, is foolhardy. When you become trapped in a mortgage you can’t manage, and you have little equity in your property, you won’t be able to refinance or sell your house at a price that will cover what you owe—thus making you a likely candidate for foreclosure.
As the well is runs dry, retail spending is also threatened, and the economy suffers. Our retirement options become limited and we must consider working for longer periods into old age. To avoid foreclosure notices in the future, a more sensible plan must be worked out.
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