In recent months my local real estate market has been surging and it has now come to the point where everyone believes that their home is worth two to five times what they purchased it for.
Of course, this leads them to believe that their home is now a source of cash.Â In just my office alone, three people have refinanced their homes and pulled the “equity” out for other purposes.
Now, I am not against this procedure if the money is reinvested at a higher rate of return than that of the mortgage interest.Â In fact, I have suggested that previously.
However, in the instances that I have seen, these people have proceeded to buy cars and furniture with the money that they have “borrowed” from their home.Â These items are proven depreciating assets and are not smart purchases with borrowed money.
Yes, I know most people purchase vehicles with borrowed money and the interest rate on a home equity loan is lower than that of a consumer loan.Â However, these individuals had no intention of buying a new vehicle prior to re-financing. Bad move.
It is almost as if they don’t think that the loan has to be paid back.
What I find most interesting about this scenario is that people don’t even pay attention to the world around them.Â This situation has been an ongoing problem in parts of the United States for years now and it seems people in my city are simply ignorant to the problems that it has caused.
What is most ironic about this situation is that I work in a financial institution.Â I would like to think that my co-workers would know better.Â Thankfully, they are not financial planners!
If you are interested in my situation, I practice what I preach:
I currently have a mortgage on my home, but maintain ~40% equity (Market value- mortgage balance).
I currently have no consumer debt.
Both of my cars are paid for.
I have a high-interest savings account holding one year of living expenses.