Escape from Mortgage Madness: Another Common Sense Rule

By Richard Barrington
LoanPage.com Columnist

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With the news media highlighting stories about unfortunate homeowners being forced out of their homes by mortgage foreclosures, two common-sense rules for home equity borrowers come to mind: don't confuse equity with liquidity, and differentiate between spending and investment. This column will focus on the second of these two rules.

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Some Mortgage Holders Have Only Themselves to Blame

Blaming rising interest rates for the bulk of the mortgage crisis just doesn't hold water. Earlier this year, interest rates rose from 6.14% to 6.74%. On a 30-year, $200,000 mortgage, that would mean a rise in monthly payments from $1,217.16 to $1,295.87. In very few cases would a rise of less than eighty dollars on a twelve-hundred dollar mortgage payment make the difference between keeping up and defaulting.

Poor planning rather than rising interest rates should take the blame in most cases, and this is especially true in cases where a home equity loan was used for spending rather than reinvestment.

Differentiate Between Spending and Investment

A home equity loan may be used for a variety of things, but there is an important distinction between a home improvement loan and a loan that is just spent. In fact, there is a sliding scale here.

A home improvement loan is a form of investment--you are adding to the value of your home, so this somewhat offsets the financial liability represented by the loan. This can be responsible borrowing as long as you can afford the payment. At the opposite end of the scale is borrowing against home equity for something non-tangible, such as a vacation. Once that vacation is over, you have no asset to balance against your new liability. It is just pure debt--not only haven't you invested, but you've spent on something of very short-term value.

Sources
Freddie Mac
Yahoo! Real Estate

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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