RE question - what about "pulling out equity"?

[Porsche-O-Phile]

With all this talk about RE, the RE collapse, the unaffordability of housing, loss of value, etc. I have to ask the more experienced individuals here - under what circumstances WOULD you pull equity out of a house or other RE investment?

It seems to me one of the biggest problems we've seen in the last few years is people using their homes as ATMs. This is particularly bad when the people have little or no real equity in the properties they're borrowing against.

So I'm just curious - what purposes do you all consider "acceptable" to borrow against (if any) and which not?

[rammstein]

Borrowing equity to buy a dream vacation or a new car is bad.

Borrowing equity should be done to pay down debt, or invest in something generating profits.

FORMULA:

IF:

interest rate on mortgage < Interest rate on debt OR profit rate on potential investment

THEN: Borrow

Otherwise, don't.

Done.

[craigster59]

I've only tapped the equity in my home to purchase rental property. Otherwise, untouched, not for cars, vacations, home improvements, etc. I do know some people who purchase cars using home equity to write off the interest on their taxes, but it's not my bag.

[motion]

Jeff, I've pulled out a bit in the past to help with down payments on new property acquisitions. But, that was back in the day when HELOCs were running at 5% interest. Now, you're looking at 9-10%. Those are crazy numbers and personally, I wouldn't pull money out unless you were faced with a serious emergency.

[Porsche-O-Phile]

Kids' education? Business venture? Retirement fund (particularly a tax-deferred one)? Just some thoughts that are coming to mind. I don't own anyway, but I'm just wondering - trying to understand this better in case I've been missing something all along.

As a general rule, I've always been taught that HELOCs are evil, but I'm wondering if that's more bad advice I simply got from my parents (it's about the only kind of financial advice I ever got from them).

[Seahawk]

I agree with Rammstein with some caveats:

- Equity in real estate is not a "hard" asset..fluctuation's in the market can decrease or wipe out preconceived equity. The problem with the current market is that many folks borrowed against equity and reinvested the loan in additional real estate anticipating a "hard" asset that would also grow.
Ouch.

- Never borrow more than you can afford to repay based on the tried and true formulas of income versus debt service: long established but recently ignored.

- Save at least 15% of your gross income.

- Just like Catholic birth control, in real estate, timing is everything.

[Burnin' oil]

"Pulling out equity" or "pulling out cash" is mortgage broker sales talk to fool the idiots. The question is "should I borrow money secured by my home?" Sometimes yes but usually no.

[dmcummins]

Ive used a home equity line a few times in the past. Only because I could go to the bank and get the money that day. Some times you come across a deal and need the cash quick. Transfering money from my brokerage account usually takes a few days for the money to clear.

Ive never paid more than a month's interest though. I havn't used it in years, my house is paid for, but I still have the line of credit on it. But the interest rates are like 8% the last time I got a notice on it.

[Rick Lee]

I did a HELOC on my last house to pay for much-needed and costly home repairs, which paid for themselves several times over when I sold the house shortly thereafter.

[KFC911]

I've had my primary mortgage paid off for some time, but do have a substantial HELOC that I occasionaly use. It's never for very long, and typically for other investment properties, etc. Actually, I even used it for my 911 (back when the rate (follows prime) was like 4%) but paid it off in short order. I had other sources that I didn't want to liquidate that were fetching a much higher return, tax considerations, etc. so it just made sense. From my perspective, it's a tool to be used prudently (for things like 911s ), and investment properties (avoids a lot of bs), and I would never use it as "found money". I do not have "other debts" like CCs, etc. but I could see someone using a HELOC to consolidate higher interest loans, but I would question the other debts first, and make damn sure the CCs were destroyed first.

ps: Home improvements, etc. that add equity would also be perfectly reasonable as in Rick's situation imo.

[Dantilla]

Pretty simple principle:

I only borrow money to make money.

I don't even like the idea of consolidating loans. It's stupid to pay for last week's pizza over time by using a credit card. To my mind, it's even worse to pledge your home as collateral to pay for last week's pizza. Better to have dumb purchases unsecured than risk my family's roof.

[Flatbutt1]

I'm currently considering a home equity loan to do some badly needed repairs on the house. And I am experiencing some serious anxiety about it. BUT in the very worst case ,should I lose my job or some such, I do have other assets to liquidate and cover the loan.

But I'm freakin' none the less.

[daepp]

Never borrow on your home to pay of cr. card debt - regardless of lower rates or income tax deductibililty.

Studies have shown that unless you got through the pain of paying off credit cards to zero, that if you borrow on your home to pay them off, a debtor will be back to the same level of c.c. debt within 12 months.

And all those meals and vacations will now be repaid at interest for 30 years.

M home is free and clear, I'm 44 and live in So Cal, I believe in private education, have 3 kids under 16, and will never borrow on my home for living expenses, tuition etc.

I do know htere is a valid argument for utilizing the equity in a home of for investment purposes to aid retirement, but I just can't bring myself to do it. Too much comfort in having it paid off I suppose.

[911Rob]

When I was young, there was no such beast as borrowing against your equity. Probably a good thing for me?

Today I and many of my business associates use a personal line of credit secured by our home equities. Nobody I know uses that PLC for anything but investments that make money.

ie: I borrowed $150,000 and invested it into a land purchase. My partner and I owned the land free and clear. We then took a construction loan for $550,000 and developed the land into 22 lots with sewer, water, power, etc. The lots are worth about $100,000 each, which would make the property valued at $2.2 Million with a 0.55 Million loan against it.

I'm now developing the homes on the land with another partner JV; no risk whatsoever to me and I'll pick up another Million, split between my land partner and I.

I have no challenges whatsoever using equity to make money! Go for it.

[KFC911]

Originally Posted by daepp

Never borrow on your home to pay of cr. card debt - regardless of lower rates or income tax deductibililty.

Studies have shown that unless you got through the pain of paying off credit cards to zero, that if you borrow on your home to pay them off, a debtor will be back to the same level of c.c. debt within 12 months.....

I've changed my mind on this one and concur. I've never had CC debt, etc. and was just thinking "hypothetically", but have no doubt that the above is probably true. "Borrowing in order to make money" makes it pretty simple...

[Rick Lee]

Originally Posted by Wayne at Pelican Parts

Right. I have a car loan through Honda - 0.9% financing. I'm now taking the money that would have paid for the car and investing it. It's basically free money. Wifey just had Lasik - zero percent financing for 18 months - can't resist that one...

-Wayne

I did the same thing on my 330i. BMW was running a special the month I bought it for 2.9% financing. Couldn't pass that one up. No point in selling investments to pay that one down.

[Moneyguy1]

If you take out, say, that 80% of the 1 mill value and conservatively invest it, take into consideration that, at 6% interest, your monthly payoment will be $4,796 for 30 years as an example (total 30 year cost of $800,000 = $1,726,560). Interest only loan would be $4,000 per month. Make certain that the investment you make pays considerable more than that and consistently.

I tend to be a conservative investor. Others have much higher risk tolerance than I.

[KFC911]

Originally Posted by Moneyguy1

....I tend to be a conservative investor. Others have much higher risk tolerance than I.

I am too... I like (and want to continue) to sleep well at night even under worst case scenarios. If under unforseen circumstances, the "merry-go-round" stops, I don't want to owe anybody anything, much less have my primary residence "in play". I'm "small potatos" compared to what some here do, but I've seen too many folks blindsided by job losses (mergers, outsoucing, cost cutting measures, etc.), and being "leveraged" only adds to the stress. I don't think anybody's gonna bail me out like they do Trump, but then again, I wouldn't expect them to .

[Moneyguy1]

Agreed. There are true "High Rollers" here that I could never compete with.

Live simple and within your means and you will be a happy man.

[911Rob]

Originally Posted by KC911

I am too... I like (and want to continue) to sleep well at night even under worst case scenarios. If under unforseen circumstances, the "merry-go-round" stops, I don't want to owe anybody anything, much less have my primary residence "in play". I'm "small potatos" compared to what some here do, but I've seen too many folks blindsided by job losses (mergers, outsoucing, cost cutting measures, etc.), and being "leveraged" only adds to the stress. I don't think anybody's gonna bail me out like they do Trump, but then again, I wouldn't expect them to .

I can totally relate as I've been a developer for 25 years..... look up the word developer in the dictionary and it'll tell you, "someone in the process of going broke." Very challenging game; so after 25 years and never having gone broke; you can understand appreciate the odds I'm sure.

The older we all get, the more conservative we get too. Who wants to be sent back to the starting box at 50?

I like to be in control; so I've invested thousands of hours and dollars into my knowledge base; I'm a construction engineer and well read too. I'd have a very difficult time advising someone to borrow their equity and put it into something risky or whereby they lack the knowledge. You need the knowledge first.

When my wife bought her brand new Rendevous the dealer offered us 0% financing on 100% of the purchase price. I said, "yeah right, for the first 6 months or what?" Nope, it was for the entire term. I asked him if we could just get a break on the price and forego the financing. Nope, it was some GM deal for people with good credit. So I took it and invested the money in a property that has more than tripled in value in the past year. Shucks.

Like I said in my first post; I'm glad borrowing equity against your residence wasn't a popular thing when I was younger; probably would've lost the whole farm at some point? My home has always been my foundation.

Be careful when investing and ALWAYS count the downside..... can you carry the payment for the next 10 years, etc. There is always a downside and you need to plan for it, don't focus on it, but plan for it.