According to data from Freddie Mac, Americans are back to tapping their homes for cash. During the first quarter of 2021, home equity loans cashed out, reached an estimated $49.6 billion, up nearly 80% from the year ago period, but still below the $84 billion quarterly cash-out rate reached in 2006. A decision that proved to be a financial disaster for many during 2008. “When will they ever learn?”
These are boom times for housing. Prices/valuations are high, interest rates are low, and thanks to the government, the country is awash in “free” money. Apparently, some think this is a great time to leverage themselves to their eyeballs. But what happens during the next economic down turn? That’s when house prices soften, you lose your job, you don’t have any equity left in your home, and you can’t make the mortgage payments.
None of the above should be seen as a universal criticism of a well-planned use of a portion of your home equity to fund an appropriate investment. Whether, and how much, to increase your mortgage depends on your personal financial situation and the use of the funds.
This has the potential to be a life changing decision. A lot of thought and some informed advice might be prudent.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®