Home Equity - What’s it for?

American consumers are among the world’s worst savers. Fifty years ago, we put 10% of our earnings away in the form of savings, and built equity in our homes by paying off the loans and keeping the money. Today, we’re lucky if we save 2% and few of us every pay off our home loans. For the most part, we just aren’t savers. We spend, spend spend, and the result is that we have mortgages, auto loans, and an average of about $10,000 in credit card debt. This puts most of us in a precarious state, and if a disaster should strike, we might be left penniless.

A record number of Americans now own their homes, and there’s a wide variety of lending options available so that most anyone can buy a home. With such a low savings rate, most people in this country have more value in their house than anywhere else. With so much of our net worth tied up in our houses, we are pretty much relying upon our homes to finance our retirement. This is particularly true now that few employers offer retirement funds. We’re expected to fund our own, and the opportunities are there in the form of 401(K) funds and whatnot, but we don’t save.

For many of us, our house is all we will have for retirement.

That’s not necessarily bad; real estate prices have been skyrocketing during the past five years, and many Americans now have healthy, six-figure equity in their homes.

 That could fund a pretty nice retirement if one was fairly thrifty. What’s the problem? We’re borrowing against that equity in record numbers. In fact, Americans will probably borrow a quarter of a trillion dollars this year against the value of their property.

If you’re going to retire on the value of your house, then you shouldn’t borrow against it.

It just isn’t possible to have it both ways. We can’t use the value of our property, again and again, through home equity loans or HELOCs to buy boats, luxury vacations, or to fund debt consolidation or whatever and still expect that money to be there when we retire. It’s just not realistic to think that we can spend the money...and not spend the money at the same time.

So, what to do? The options are pretty simple. We, as a group, need to start saving more. That means making aggressive contributions to retirement funds, 401(K) funds, or IRA funds. Alternatively, we can stop borrowing against the value of our property. The notion that there is money in our houses is sort of an artificial one, anyway. The equity, or increased value of our property, is only realized when the house is sold. If you don’t sell, you don’t really get any extra money. All that equity really offers you is an opportunity to borrow more money. And with that opportunity comes a chance, should misfortune occur, to lose that house completely.

It can happen. Just ask anyone who lives in New Orleans. 

Save your money, or borrow against your house. You can’t do both.