Here We Go Again

Recently released data from Freddie Mac revealed that nearly 50% of Americans, who have recently refinanced their homes to take advantage of lower interest rates to reduce borrowing costs, are taking cash out.  This means that the home owner is increasing the principal balance, and reducing equity.

This is the height of folly.  Apparently, people have short memories.  Less than 10 years ago, a rush to refinance home mortgages to raise cash to spend (squander?), resulted in a rash of foreclosures when home owners failed to meet their monthly payments and had no equity to fall back on.

The more equity you have to support your mortgage, the better positioned you are to weather a temporary loss of income and/or a temporary decline in home values.  If you have equity, you are also in a better position to renegotiate terms with your lender to see you through a period of temporary financial stress.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®