Housing prices are finally on the upswing again. Do you know what that means? It means that homeowners will once again be building equity in their homes. And do you know what happens when homeowners are seeing more equity in their homes?
- Consumer Confidence rapidly improve. More money, means more confidence, means more spending, which leads to the economy improving, and people working more and making even more. And, this goes on and on, until the next bust!
- The Wolves Return– Second, when home prices appreciate and homeowners have more equity to use as security to borrow money. the banks know it. And, they do everything in their power to get you to borrow money from them.
That’s exactly what lead to the housing bubble? Remember how every day you would receive another enticement from lenders anxious for you to borrow money from them. it didn’t matter what the money was for. Improve your home, send you kid to college, or just blow it on a vacation. Risk? What risk? And, how did that work for everybody?
But, wait a minute. Maybe it’s not so bad to borrow against your home. If the timing is right, and you can afford to take the risk, and you’re borrowing for the right reason, it makes sense to borrow money using your home’s equity as security. Ask yourself the following questions, before you get sucked into responding to all the lender advertisements you’ll soon get.
- Am I borrowing for a good reason?
If you’re borrowing money using your home’s equity, do the benefits of having that money for immediate gratification, outweigh the risk associated with owing a lot more money. For example, If you borrow money to go on vacation, you’re probably going to wonder why you were so foolish, once you’re back from vacation and have to pay the money back. On the other hand, if you were to borrow money at a low interest rate to invest in more real estate, the benefits associated with rapid appreciation could far outweigh the risks associated with owing more money, especially if the home is worth a lot more money later on. Do you see the difference? If you’re borrowing to improve you’re situation long term, then the risk is far more likely to be worth it.
- Is the timing right for me to take more risk?
This is a critical question that must be asked. Consider the homeowners who bought real estate 7 or 8 years ago to buy more real estate, thinking they could flip the property for a quick buck. That worked well for the first year or so and people made lots of money. Then, the bottom fell out of the housing market and the people who bought at the height of the boom, lost their shirts. (and homes, too!) Referring back to the previous example, with Real Estate recovering, the timing may be perfect to take on more risk.
What is my risk appetite?
This is the final and most important question. If you take the risk by borrowing more money, what will happen if you can’t afford the additional amount you owe. If you’re going to lose sleep over your decision, or just plain can’t afford to take the risk, don’t take it, Period!
So, what’s the best advice? Ignore the coming pitch the banks will be giving you to borrow money unless you’re borrowing to invest wisely, when the timing is great, and you can afford to take the risk. For some of you, that means: Borrow and Buy More Real Estate!