Don’t Bet the Farm

Two recent articles suggest that we may be seeing a return to riskier home financing.  Friday’s Wall Street Journal carried an article by Anya Martin asking “Tempted to Put Home Equity to Work?”  Sunday’s Detroit Free Press included a commentary by JC Reindl highlighting the return of Fannie Mae and Freddy Mac insured mortgages featuring a 3% down payment requirement.

Home equity loans are almost always a bad idea.  An increase in home equity is nearly always a consequence of an improving real estate market.  Markets fluctuate.  If you skim off any increase in value during a strong real estate market, what are you going to do when the market swings the other way and you are under water on your mortgage?

Minuscule down payments when financing the purchase of a home present the same problem.  If the real estate markets take only a modest down turn, your loan is under water.  Yes, there is something to be said for helping first time buyers to purchase a home, but at the risk of their financial future?

Home ownership, like investing in general, is not a one-size-fits-all proposition.  Investors, with the assistance of their advisor(s), should carefully consider their particular circumstances.

Remember, just because someone wants to lend you money, doesn’t mean you should take it.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®