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Originally Posted by joseblanco
This type of loan makes every home a debt trap!! I am not a chicken little sky is falling housing bubble person, but this sort of widespread exotic mortgage product lending with no due diligence on the part of the banks to make sure the person is suitable for the product may result in serious problems for our economy in the very near future. Remember the savings and loan debacle!! The internet stock bubble!! When will we all learn just to be conservatively prosperous!!
http://www.businessweek.com/magazine...eek+exclusives |
It is about leverage. A home is not an investment. But it is where most people's net worth is (because most people do not invest). So a house becomes forced savings, which should only be accessed when the asset is SOLD.
I would much prefer to own my home free and clear, When that happens by age 50, I'll have ~$2550 of free cash flow I do not have now. But owning my home free and clear is not the #1 financial goal... it may not even be in top 5.
In the meantime, I put my money to work for me. If I earn 11-15% in my 401k (which I put 10% of income to) and my HELOC is 8% (without tax deduction), it makes sense to make that HELOC payment and contribute to investments. I could lower 401k to 6% to own house sooner, but is that the BEST return?
If the HELOC is used for something consumable- bad idea
If HELOC is used to add a room to house- GREAT idea
If HELOC is used to improve house- OK idea
In my case, HELOC was part of purchase agreement for the house
If HELOC is used as emergency fund, I could see that as a good idea.
If HELOC is used to pay medical expenses, I see that as a good use of emergency fund.
Money needs to work for me so I don't have to work for money.