Home equity accumulation is becoming rare

Fifty years ago, most homeowners took out traditional mortgages, put 20% down, and paid the loan until it was done. If the mortgage was paid off, the homeowners rejoiced in the fact that they had no more obligation to the bank, and that was that. Home equity loans or HELOC

 loans were fairly rare, housing appreciation was modest, and few people gave any thought to whether or not their home constituted an “investment.” How times have changed.

Today, with prices increasing at record levels, homeowners are seeing something few of their parents ever saw - equity in their homes that often amounts to several hundred thousand dollars. A generation ago, equity of $250,000 in a house would have been seen as an ideal nest egg and added assurance that the retirement years would be good ones. Then, homeowners would have sat on the money, content in knowing that the “value” was there and leaving it at that. Today’s homeowners are different. They are more mobile, less likely to keep a job for a long period of time and certainly less likely to have an employer-provided pension fund at their disposal for retirement. As a result, more and more, if not most, homeowners are using their equity now, rather than saving it for later.

American homeowners are on a pace to borrow more than $200 billion against their homes this year, far and away a record amount. Some are using their equity to take out loans for debt consolidation or educational expenses; others are simply using the money to live well. The typical homeowner feels that there is no need to keep that value bottled up, and that it might as well be used now. Of course, equity isn’t really money. The only way to realize financial gains from the equity in your home is to sell it. If your $100,000 home has doubled in value to $200,000, you have “gained” $100,000 in value, but only if you sell it. If you borrow against it, you are, in effect, buying your home again for more money. Granted, the money is cheap compared to other loans, such as credit cards, and the interest is tax deductible. But is it really smart to live this way, using your property to fund new cars, boats or vacations?

Some realtors and a few financial advisors consider it unsophisticated to build equity, and suggest that it’s actually smarter to spend the money or invest it elsewhere. At least one has compared keeping equity to stuffing money under your mattress. Many homeowners in areas with rapid appreciation are refinancing once a year as their homes appreciate in value. Some admit that they will probably never pay off their mortgages.

Each investor or homeowner must decide what is best for them, but traditionally, a house is a place to live first and a place to accrue value second. Any time you borrow against the value of your house you are placing your property at risk. The possibility always exists that some dire financial situation might arise that calls for you to sell your home, and if it’s leveraged to the hilt or if home values decline, you could find yourself up to your eyeballs in debt.

It’s your house. Be careful with it.