By: Dr. Lynn Reaser
At the peak of the last housing boom, people’s homes became their personal piggy banks. Enticed by zero or low down payments, they tapped home equity loans to finance all types of consumer spending. The good times were indeed very good for many but came to an unhappy end with many losing their homes to foreclosure.
Home equity loans are beginning to come back. Are we at risk of seeing a repeat of the last cycle?
The answer is, unfortunately, yes. Too often we fail to learn from history. The housing market is still in its early stages of recovery and many homeowners are still “under water” with their unpaid mortgage balance exceeding what their home is worth. However, further increases in home prices and a gradual relaxing of lending standards could cause more people to again tap their homes as a source of credit. They may well take on debt burdens that could be problematic as interest rates rise, incomes fail to keep pace with debt servicing obligations, or home prices fall back.
Caution and prudence are good watchwords.