Is Home Equity Overused?

The September 6th edition of USA Today had an interesting article about home equity (or lack of it) and the "dependence" homeowners have on it. One of the great features of owning a home (other then the tax deduction) is the equity one has in it. From 2003 thru 2005, Tucson and much of Arizona saw a huge jump in property values and home appreciation. Many home buyers, myself included, were lucky enough to buy at just the right time and in just the right place, and then BAM....instant equity. It's great knowing that the home you bought has doubled in value over two years, but it's also dangerous for those that don't have the strongest control over their finances. If your local real estate market continues to see appreciation, then great; spend to your heart's content without worrying. But today's housing market has slowed considerably, and home appreciation is not what it was a few years ago. Too many homeowners are still using their home's equity to pay off high interest bills without restructuring their spending habits, or are buying expensive luxury items and trips when their equity is fading away. They're putting themselves further into dept with no "escape hatch" in site.

Now I do think that a home equity loan used wisely is a great thing. Why not pay off the high interest credit cards when you can get a lower rate, or consolidate loans with a home equity that's tax deductible. That's a no brainer. It's also great if you want to add a pool or landscape the backyard; anything that will add value to your home. And I don't think it's a bad idea to have a HELOC in case of emergency. I've even seen individuals buy new vehicles with their home's equity (although I'm not sure how I feel about that; what would Suzi Orman say?) But now it seems that it's gotten out of control, and many homeowners rely on their home's equity to pay their bills. According to a report by CardTrack , from 2000 to 2006 the average credit card debt increased from $7,842 to $9,659. Still today a large number of homeowners are paying off these credit card balances with home equity loans on their homes. Unfortunately once the balances are paid, many homeowners continued to make purchases, charging the cards right back up to their limits. Creditcards.com reported that more then one-third of credit card holders acknowledged using their cards for purchases they can't afford. The problem here is that home equity is shrinking away as the nation's current home values remain flat or drop, leaving homeowners without a way to pay off these debts. Amazing that credit card debt is rising when a consumer poll done by Lending Tree found that 48% of Americans are uncomfortable with the total amount of household debt they have.

If so many homeowners are uncomfortable with the amount of debt they have, why does it continue to grow? Sure there are emergencies that require some to utilize their equity, and others consolidate all their loans to make paying off debts easy. But I do think that a lot can be contributed to the consumers desire to live in the here and now. Who knows what tomorrow will bring, so let's enjoy today. We're are all guilty of thinking like this from time to time. But we have to draw the line between enjoying life and balancing our finances, and sometimes it's a hard line to draw. Buying that special item or vacation we really want with a credit card is alright, but relying on our home's equity to ultimately pay for it every time might not be the best decision in the long run. It's important to remember that unsecured credit card debt an be erased, but filing for bankruptcy is not going to erase a home equity loan.