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ICFE eNEWS #19-15 - April 9th 2019

5 Questions To Ask Yourself Before Borrowing Against Your Home's Equity

By Jim Garnett, a/k/a Ask Mr.G, a member of the ICFE's Board of Educational Advisors

1. What happens if I cannot repay the loan as agreed? 

When we borrow against the equity in our home, our home becomes the collateral (security) for the loan. If we do not repay the loan as agreed, we are in danger of forfeiting that collateral and losing our home to foreclosure. That means the lender takes possession of our home, and we are out on the street.

No one envisions that this would ever happen to him, but it does happen. In fact, it happens every day. Current FDIC statistics reveal that an average of 1 out of every 200 homes will be foreclosed upon.

What would happen if 5-6 years down the road:
  • A family member comes down with a chronic illness?
  • A tragic accident results in a mountain of unpaid medical bills?
  • Something beyond your control reduces your two-income family to a one-income family?
  • An unexpected pregnancy occurs and Mom now wants to transition to a stay-at-home Mom caring for your three children?
  • The overtime at work stops abruptly?
  • The part-time job you have had for 8 years disappears?
These things happen to people just like you; things that cannot foreseen, predicted, or controlled.

When you allow your home to be used as security for a loan, you are putting your home at risk. If you do not repay as agreed, the lender can take possession of your home.

2. What will happen if I decide to move in the future?

As of 2016 the tenure of homeownership had increased to 10 years but as Lee Nelson from MortgageReports.com tells us, "Many things can affect how long people stay in the homes they buy. They might have to move because of a job or a sick elderly parent a few states away. They might need a bigger or smaller home depending on the size of their family, or they might just want a whole different style or want to move into the city or move out into the country."

If and when you move, wouldn't you would want to have as much equity and value in your home as possible? After all, it is the equity in your home that is most often used as a down payment for the newer place. What will you do if you have taken all the equity out of your home by borrowing against it?

3. Is borrowing against my home a good way to pay off debt?

The answer is emphatically "NO!" Why?

Because borrowing does not pay off debt; it merely "moves" the debt to a different location. I've often said that this is similar to digging a hole in your front yard in order to fill in a hole in your back yard!
Because trading unsecured debt like credit cards for a secured debt is a good idea for the lender but rarely for you.
Because history shows that borrowing to "pay off" debt does not work in real life. Within 3 years the credit card balances "grow" back to where they were previously. The explanation is simple: borrowing is a temporary "fix" and requires no change to our spending habits

4. Will I be using my home's equity for something that is quite temporary?

Although home equity takes years to build, it is often "spent" on something quite temporary. From exotic vacations to expensive vacuum cleaners, from elaborate weddings to expensive jewelry, from unpaid credit card balances to unnecessary wants, all are used to justify borrowing against equity. When the thrill and pleasure of what we purchased is forgotten, the debt we created against our home still remains!

5. Could adding additional debt to my home affect my retirement years?

Because of borrowing against their home's equity, many people enter their retirement years with mortgage payments. Adjusting one's lifestyle from a full salary to a fixed income is difficult enough, but when you continue to mortgage payments it can make life a real test. The dreams of travel, relaxation, and living comfortably evaporate because we still have that major monthly expense of a mortgage payment.

Because of this bleak prospect, some will postpone retiring by another 5-7 years, and some must secure a part time job working for a much lower wage than before.

My goal in this article is to cause you to slow down and carefully think through this "opportunity" to turn your home's equity into instant cash. It has far-reaching effects, and at times, can be disastrous.

Jim Garnett.

Get questions like this one answered in my new book, The Nuts and Bolts of Cash and Credit: An Encyclopedia of Financial Knowledge" on Amazon.com.
Ask Mr. G
Jim Garnett, The Debt Doctor
AskMrG Consulting, LLC
2216 SW 35th Street
Ankeny, IA 50023

Paul S Richard PhotoICFE eNEWS is available FREE upon request by visiting our Web site and filling out the contact form, and selecting "Yes" for "Add to Mailing List. Please pass this eNEWS on to your peers and interested others and invite them to subscribe for free. Also, visit the ICFE's new Web site: StudentDebtHelp.org

Sent by:

Paul S. Richard
President - Executive Director
Institute of Consumer Financial Education (ICFE)

About the ICFE:

The Institute of Consumer Financial Education (ICFE) was founded in 1982 by the late Loren Dunton (creator of the Certified Financial Planner (CFP) designation and founder of the College for Financial Planning in Denver, CO.) The ICFE is dedicated to helping consumers of all ages to improve their spending practices, increase savings and use credit more wisely.

The ICFE is an award winning, nonprofit, consumer education organization that has helped millions of people through its financial continuing education courses programs and resources. In addition to eight Certification courses covering identity theft, credit files, credit repair and credit scoring, among others, it also publishes the Do-It-Yourself Credit File correction Guide, which is updated annually. The ICFE has distributed over one million Credit/Debit Card Warning Labels and Credit/Debit Card Sleeves world wide.

The ICFE is a partner with the national Jump$tart Coalition for Financial Literacy and the California Jump$tart chapter. The ICFE staff is also active with San Diego Saves and Military Saves, both offshoots of America Saves.

The ICFE is also an on-line help for consumers who spend too much. ICFE's spending help was featured in PARADE Magazine in the Intelligence Report section. The money helps and tips are from the ICFE's Money Instruction Book, our course in personal finance.

The ICFE helps consumers and students with mending spending, learning about the proper use of credit, budget and expense guidelines, how to set up and implement a spending-plan and also how to access financial education courses and how to teach children about money. Other ICFE services include: Ask Mr. G library, a free eNews service, and an online resource center for students, parents and educators, plus financial education learning tools in the ICFE Book Store.

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