Home owners are constantly bombarded with offers for home equity line and refinance opportunities. All of this advertising can sometimes lead people to decide to refinance for reasons that are less than practical, leaving them to regret their decision later.
While there are reasons people should not be refinancing their home, there are also some good reasons to use the equity built up in one’s residence. Financial troubles related to layoffs are one of the best reasons to borrow against a home rather than risk losing it.
Unnecessary Refinancing can Lead to Hardship Later
Before getting into borrowing for the right reasons, taking out a line of credit for less urgent matters should be addressed.
Far too often, people see the equity they’ve built up in their home and decide they’d like to make improvements by paying cash (via credit) to redo their kitchen or bathroom, or maybe really treat themselves by turning the master bedroom into a master suite complete with a garden tub.
Others may decide to visit new continents, buy expensive gifts for themselves or their loved ones, or maybe give to a charity they’ve always wanted to be more involved in.
While these are not bad things, and some will likely increase the value of the home, the equity that was extracted will not be present when it might be needed most, such as during a layoff.
Using Home Equity During a Period of Extended Unemployment
When people reach a point where no money is coming in, times can get tight fast. According to MP Dunleavy, in her article “The Worst Kind of Debt,” the average US household has $8,000 in credit card debt while only saving 1.3% of disposable income.
To clarify, if there is $1,000 extra at the end of the month, only $13 is being stocked away in savings! The rest is going to nights out at the movies, another pair of shoes, or paying toward the everyday credit card that gets some people through the month so they don’t have to carry cash.
When it comes times to tap into savings during a period of unemployment, there may not be much to excise. Among the options are:
- Borrowing from credit cards
- Taking a loan from the cash value on whole life insurance policies
- Taking money from the equity in one’s home.
While it may be painful to lose so much ground against the original principal and new appreciation, extracting this money may keep the household afloat until financial matters improve, or until the house is sold.
The Cost of Refinancing
Extending the life of a home loan is very costly. Even with a low interest rate, borrowing on a mortgage can cost two or three times the amount borrowed, not to mention closing costs.
Using a calculator on Countrywide.com, closing costs on a home loan (or re-fi) will cost more than $4,000 for $100,000 borrowed. So, not only will years and years of interest be added to one’s long term income statement, but the money borrowed comes at a cost that is not insignificant.
If a family must borrow against their home, and sometimes they must, it should be done with care and consideration. Borrowing during a period of extended unemployment can be a painful process for anyone, but not being able to borrow against that same home because of previous borrowing when times were not as dire can be even worse.