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.
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
What would happen if 5-6 years down the
These things happen to people just like you; things that cannot
foreseen, predicted, or controlled.
- 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
- The part-time job you have
had for 8 years disappears?
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
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
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.
© Jim Garnett, The Debt Doctor
AskMrG Consulting, LLC
2216 SW 35th Street
Ankeny, IA 50023
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About the ICFE:
The Institute of Consumer Financial Education (ICFE) was founded in 1982 by
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designation and founder of the College for Financial Planning in Denver, CO.)
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