Borrowing against the house

Tina Haapala |

Interest rates are low. They are low because the Federal Reserve wants them low. The Fed wants them low to encourage borrowing. They know that borrowed money is spent money. And spent money is good for the economy, even if it’s not good for the spender.

Because of this, and a perceived strengthening of the economy, people are starting again to look at borrowing against their homes. Generally I’m against this. But I’m willing to play along; let’s see if I can be persuaded.

One good reason might be to pay off credit card debt. After all, you could be saving half or more on the interest. But this move worries me. Usually, getting over your head in debt doesn’t happen overnight. Instead, it’s due to a lifestyle. Changing your lifestyle is not all that easy. You could use your home to pay off the debt only to have it grow again because of your habit to over-spend. I would feel more comfortable with this borrowing scenario if you demonstrated better spending habits long before transferring the debt to your house and risking one of your most important assets.

Since I help people invest their money, you may ask if I’d be in favor of borrowing against the house in order to reap the windfall of the stock market, gold, Dinar, or the current “sure-thing” investment. I’ll give you a hint: When I refinanced my house I did so to shorten, not lengthen or add to, my debt. So, no, while I don’t think you have to be in a hurry to pay off a house, I don’t think that paying on it longer is a prudent way of raising your investment funds.

Okay then, since I am a proponent of post-secondary education, you may conclude that using a home-equity loan in order to send your child to the best college is acceptable. If you think that, you’ve missed some of my other columns. For while I do want your child to excel in life, she doesn’t have to go to an expensive school to do so. Unless, of course, she agrees to pay off the loan and fund your retirement when she’s done getting her diploma.

Well, if paying off the credit cards, investing the money, or getting your kid into the “best” college aren’t good reasons to borrow against the house, then what is? Easy: to make your house more valuable. The challenge is to make sure the value increases more than the amount you borrowed. Putting in a pool, enclosing a patio, or upgrading your kitchen may make your house sell for more, but usually not enough. There are exceptions, such as adding a second bathroom to a three-bedroom house. But otherwise I want you to save for these projects, not borrow.

No, what I want you to do is protect the investment that is your house. Save for the inevitable home projects or possible structural damage as much as you can. Since maintaining your home both protects your investment and adds value, necessary projects such as a roof replacement or shoring up your foundation are good uses for your home equity dollars.

This article was published in the Wichita Falls Times Record News on July 1, 2011.