Home Equity ? Don?t Spend It on Risky Investments

The housing market has exploded in the last five years, and homeowners are finding that the equity in their homes is greater than it has ever been. The equity in a home is the difference between the market value of the home and the amount still owed on it. As home prices increase, so does the equity for those who own their homes. In parts of California, home values have tripled during the last five years, and homeowners are doing increasingly risky things with their newfound "wealth." Anyone considering borrowing against their home's equity should carefully consider the possible pitfalls of doing so.

Traditionally, most home equity lending was done for purposes of home additions or remodels. These have been considered low-risk loans, as the house is collateral for a loan that improves the house itself. As a bonus, the improvement usually increases the value of the home, making the loan even safer for the lending company. Occasionally, homeowners default on such loans, but the foreclosed property can easily be sold to recoup the loss. Times have changed, and many, if not most, home equity borrowers are now using the money for different, and riskier purposes.

Thousands of people who have suddenly found themselves with hundreds of thousands of dollars of equity in their homes are treating that value as a windfall of cash. Instead of traditional uses, such as home improvements, borrowers are using their equity to buy more real estate to use as rental property. There are cases of individuals with homes valued at several hundred thousand dollars who have borrowed against their equity, bought more property, borrowed against that equity, and repeated this process six, seven, ten or more times, attempting to build up an empire of rental property. It's hard enough for most people to manage one mortgage, but some people who are caught up in the "equity frenzy" are now managing ten or more of them! On the surface, it may appear that these intrepid individuals are simply taking advantage of an opportunity, turning several hundred thousand dollars worth of equity into millions of dollars worth of rental property. On the other hand, these "investors" may be inviting disaster.

As more and more people buy real estate on speculation, the equilibrium of the real estate market is affected. The additional competition among buyers, fueled by the real estate speculators, is causing prices to go up even more. Eventually, the market is going to peak. Buyers who need a home to actually live there can only pay so much for them before the homes simply become unaffordable. And not every speculator can own ten rental properties, as the market can only support so many rental properties before the market becomes saturated. Once that happens, prices will fall. And when they do, all of these buyers who purchased their homes using their own home's equity will find themselves under a mountain of debt.

It's nice to have some equity in your home. It's also nice to be able to borrow against that equity for home improvements or debt consolidation. Using your equity as though it was cash you can freely spend is dangerous, as many speculators will soon learn.

©Copyright 2005 by Retro Marketing.

Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including End-Your-Debt.com, a Website devoted to debt consolidation and credit counseling information and HomeEquityHelp.net, a site devoted to information on mortgages and home equity loans.

---

Advantages and Disadvantages to Selling a House on Your Own

As with any business transaction, there are pros and cons... Read More

Real Estate Investing - Basis Explained

Our complex IRS code requires that your, as a real... Read More

Realtors: Forget Your Address?

It's a large real estate agency, and the company depends... Read More

The Sadness of Old Buildings

From the book No Smooshing!For years, I've carried on a... Read More

Why Invest In Property?

Why property, some people ask when looking for an investment.... Read More

Want A $10,000 House?

How do you find a house for ten or twenty... Read More

What to Look for in a Real Estate Agent

Real Estate Agents play an essential, critical role in the... Read More

San Diego Real Estate

San Diego is home to millions of beautiful apartments, condominiums,... Read More

Working With Your Real Estate Attorney

Purchasing or selling a home will probably be one of... Read More

4 Dangers In Flipping Real Estate

If you have recently purchased some real estate for investment... Read More

Taxes When You Sell Your Home

What's the difference between death and taxes?Death doesn't change every... Read More

Should You Sell Before the Housing Bubble Pops

For the past several years housing prices have risen dramatically.... Read More

Encouraging Debt

Most of us don't talk about money, finances, credit, debt....Young... Read More

Things To Consider Before Buying a Condo Hotel or Resort Residence

Resort home ownership, such as condo hotels and fractional shares... Read More

Subdividing - But NOT Land!

Many people are familiar with the concept of sub-dividing a... Read More

As a Realtor, How Do I Attract Listings?

Have you ever noticed that despite the massive number of... Read More

Understanding Opportunity Cost When Investing In Property

While most investors have got involved in property investing because... Read More

How To Give Yourself A $20,000/Year Raise Without Asking Your Boss

Why without asking your boss? Two reasons, one, he or... Read More

Selling Investment Houses: Psychology of Mirrors

Discover new interior Design Psychology strategies to increase your real... Read More

Kings Bay Georgia Real Estate - Be Picky When You Choose your Realtor!

I have been a mortgage lender for many years and... Read More

Do I Have To Buy Real Estate Through An Agent?

Sometimes when we are very busy professionals and very rich... Read More

The 5 Biggest Mistakes Made When Getting A Business Appraised

Most business owners will, at some point, want or need... Read More

Types of Listings with Agents

There are several different types of listing contracts. Few of... Read More

Cant Rent a Work Zone

So you've picked up your first (or third, or tenth)... Read More

Title Insurance Protects Your Financial Investment

You purchase homeowners insurance to protect yourself financially in case... Read More

Understanding Real Estate Terminology

Purchasing a home can be a complicated and confusing process,... Read More

Apres-Ski

European tax haven Andorra enjoys the same fiscal benefits as... Read More

Trading Inspectors!

As sure as the spring flows at the Fountain of... Read More

Purchasing Florida Investment Property And Various Considerations

Purchasing Florida Investment PropertyConsidering researching the purchase of Florida Investment... Read More

Cashing Out of Preforeclosures - Exit Strategies for Maximum Profit

One of the quickest ways to real estate profits is... Read More

Grab Quick Profits As Real Estate Prices Soar

Real estate values rise and fall in cycles. Currently home... Read More

Housing Bubbles and You

Are we in a housing bubble? To answer that question... Read More

Budgeting Your Log Home - Creating a Checklist

If you've read my first article, BUDGETING YOUR LOG HOME:... Read More