A number of years ago, banks introduced homeowners to a new
product called "home equity loans". This gave people the
opportunity to cash out the value they had in their property and
spend it for a variety of things. There were almost no
limitations as to what you could do with the money.
Many people used it to remodel or add onto their existing homes
and that at least resulted in an increased value for their
homes. Some used it for a down payment on a second home, while
others financed college educations for their children. There
were some who purchased new cars or went on extravagant
vacations with the funds they withdrew from their homes. Chances
are that it was the introduction of home equity loans that
eventually contributed to the current recession.
Home equity loans were available in two types. One was a
straight home equity loan for a specific amount of money,
usually a percentage of the value you currently had in your
home. Another type was a Home Equity Line of Credit that allowed
people to write checks against a credit line and then make
payments according to the amount they've borrowed. Rates and
terms varied greatly with this particular type of financing and,
unfortunately, homeowners saw it as easy cash that they could
access for anything they wanted at the time. Rates were often
adjustable and related to the current prime rate. Anything that
was not a fixed rate was particularly dangerous. Not everyone
used these loans wisely.
Most homeowners used these funds for non essential purchases,
without ever realizing the exact terms of the loan and that they
will be paying these funds back over the life span of the loan.
Home equity line rates, also tended to be higher than a mortgage
rate. Since a mortgage rate was much less, many homeowners then
decided that refinancing their homes was the best way to go.
This also lead to the home no longer having equity and it also
lowered the net worth of the homeowners. Refinancing was only
beneficial to a homeowner if they used the money as an
investment that would increase their net worth.
When money became tight and banks realized that they had serious
financial problems, many began to close the Home Equity Lines of
Credit that they had extended to homeowners. Of course, people
who had been given home equity loans were not effected, because
they already had, and spent, the money offered by the banks.
Others, however, were shocked to find that money they believed
would always be available to them had been taken away. This may
have been a blessing in disguise for these homeowners, but I
doubt that they saw it that way at the time.
Merry Christmas & Happy New Year,
ez
