Tuesday, July 10, 2018

Note the lie in the headline


An article at CNBC caught my eye yesterday, particularly because the headline - and the body of the article - contain a blatant, out-and-out lie, designed to con the consumer.

Homeowners are sitting on a record amount of cash – and not tapping it

U.S. homeowners today are getting richer by the minute, but they are less likely to cash in on their newfound wealth than during previous housing booms. As home values rise, home equity lines of credit, often used to tap home equity, are flatlining, and the overall amount of money people are taking out of their homes is shrinking.

The collective amount of so-called tappable equity, which is the appraised value of a home minus the 20 percent most lenders require borrowers to keep as a safety net, grew by 7 percent in the first quarter of this year compared with the previous quarter, according to Black Knight, a mortgage software and analytics company. That is the largest single-quarter growth since the company began tracking it in 2005. It is up 16.5 percent compared with a year ago.

Homeowners now have a collective $5.8 trillion in tappable equity, the highest volume ever recorded and 16 percent above the last home price peak in 2006. The average homeowner with a mortgage gained $14,700 in tappable equity over the past year and has $113,900 available to draw. This is the amount over and above 20 percent of the value of the average home.

. . .

... overall, just 1.17 percent of available equity was tapped in the first quarter of this year, the lowest amount in four years. Why? [Borrowers] may not know just how rich they are.

“I think the typical American doesn't have that level of awareness, they're not probably studying the numbers,” added Graboske.

They also may have long memories. The housing crash was 10 years ago, but the pain in the housing market is still being felt. Millions of borrowers lost their homes to foreclosure because they used them like ATMs. Some are just now able to qualify for a mortgage again.

There's more at the link.

The lie is to refer to one's home as "cash".  It's not cash at all - it's bricks and mortar, frames and siding, foundations and roof.  There are only two ways to convert that into cash:  sell it (in which case one has to find somewhere else to live, probably at greater expense) or borrow against it.  The latter is what the banks and economists would love us to do;  borrow against our assets, go ever deeper into debt, to fund greater expenditure and grow the economy some more.  The fact that the USA is already neck-deep in debt, collectively and individually, is ignored.  That's merely an inconvenience.  The important thing, as far as they're concerned, is to goose us into greater debt to fund greater spending - so that they can make more money out of us.

I've written about the problem of debt, and how it's killing us, many times before.  I won't repeat all that now.  However, there's only one way I'd recommend using accumulated equity in your home right now, and that is as an emergency measure to wipe out every higher-interest loan and credit facility you have.  If you owe $20,000, or $30,000, or $40,000 (or, heaven help us, even more than that) on credit cards, revolving credit lines, and so on, I'd deal with them by taking these five steps:
  1. Use your equity in your home to take out a lower-interest line of credit of some sort.
  2. Use that money to pay off, in full, every high-interest credit card or other debt that you have.
  3. Close all those accounts you've just paid off, and destroy the credit cards.  Don't take out any others to replace them.  You never want to get caught in that debt trap again!
  4. Use the monthly payments you've just freed up to save an emergency supply of cash - at least one month's worth, preferably three to six months' worth.
  5. As soon as you've built up that reserve, pay the extra amount every month into your home equity line of credit until it's paid off, and you're left with only the original debt owed on your home when you started this process.

By doing that, you'll be helping yourself - and you're the only person you need to be helping, until your finances are in better shape!  If you're already in that happy situation, where you're debt-free except for your home, build up your financial reserve as well - presuming you don't already have one - and then consider paying more into your mortgage every month.  That's what Miss D. and I are doing.  We bought our home on a 15-year note, and we intend, God willing, to pay it off in ten years.  That way we'll own the roof over our heads, giving us greater security, and we'll have our current monthly home loan payment available for other needs.  What's more, the interest rate on our mortgage is many times higher than what we can get on a savings account or certificate of deposit, so by paying more into it, and reducing the interest that we owe, we're effectively paying ourselves that higher rate of interest.

Nobody owns "cash" in their homes - only the value that can be realized by selling it, or borrowed against by going into debt.  Anyone who tells you otherwise is lying to you, and has an ulterior motive.  Remember the old Latin motto, "Cui bono?Who benefits?  Today it's often known as "follow the money".  If other people are urging you to take advantage of the "cash" that's in your home, they have a reason - and it's usually one that benefits them, rather than you.  Bear that in mind.

Peter

11 comments:

Islacrusez said...

I only last night rewatched the Extra History series on the South Sea Bubble... Seems it's still relevant today.

If you've not seen it, here: https://www.youtube.com/watch?v=k1kndKWJKB8

Divemedic said...

We did that: mortgage paid off, no debt, credit card is a cash back card that we use to pay bills, gasoline, etc., and then pay off every month.

Rob said...

I saw that headline somewhere & figured it was click bait or a com'on for a scam.
Looks like it was the second one...

Gorges Smythe said...

Bookkeeping 101 - A home is EQUITY.

Well Seasoned Fool said...

Assuming your debt isn't a problem, another strategy is a life insurance policy equal to you mortgage. Your monthly premiums build cash value. At some point, the accumulated cash value of your policy will equal the balance on your mortgage. Makes more sense than paying an extra amount each month on your mortgage.

If you take the extra amount route, make sure you make two separate payments, one the mortgage payment and the other marked, "Payment on principal only".

Javahead said...

Cash value life insurance is about the worst investment you can make. If you need life insurance anyway, buy term life in the same amount, then invest the difference in price. You’ll build up your cash reserves a lot faster.

And a paid off house is a wonderful thing. We paid ours off at the end of last year, and have been putting the extra cash into needed maintenance. So far, we’re money ahead despite a new roof and exterior paint job.

Sam L. said...

Can't take out a brick or a piece of a wall or a room and sell it.

cannon said...

javahead....wrong....and here's why
whole life, or as you call it, cash value, is more expensive up front, but it eventually pays itself off. like in 25 or 30 yeas. then you have the insurance and NO monthly payments.
term is cheaper....UNTILL you turn 65, then it triples or more, to a point it is unaffordable. then you have no insurance.

having listened to the insurance gurus, and found out the hard way, I would recommend every young person buy a whole life policy in the amount they can afford, as soon as possible, and increase the coverage as they can afford it. when you turn 65 you will thank me.

oh, and your house is NOT an ATM. don't use it like it one.

Javahead said...

Life insurance - as you get older - makes just about no sense. Having investments does - and you can use the money when you're alive.

I expect to retire in another 6-7 years. And since we've been investing steadily since our late 20's my wife and I have several times the cash value of the best whole or universal life policy we were offered back then. In the last 30-some years, the difference has amounted to hundreds to thousands of dollars in premiums every single year. And our investments over that period have grown at a much higher rate than any insurance product I've seen.

When you've got young kids or a family, having lots of life insurance makes sense. But when you're nearly retired, have your house paid off, and have enough investments to live in modest comfort for the rest of what you hope will be a very long life, what's the point? If I dropped dead tonight, my wife will have enough to live comfortably for the rest of her life, and our kids should likely inherit a decent amount afterwards.

Between company provided insurance and a term life policy, I've always been insured. But when our latest term life policy expires next year I'll be throwing the money into investments instead. You're free to choose otherwise - but I think you're shortchanging yourself.

Bill Peschel said...

The only reason, from a business standpoint, that you would borrow any money is to do something with it that would make you more money than you would have to pay back.

Anything else is enslaving yourself to debt.

Put it another way: We paid off our 30-year loan after about 13 years (yeah, we had some help, but we scrimped, didn't take vacations, didn't have cable or cellphones and made do with two cars that we kept running until they fell apart).

We not only saved from not paying the interest on the last 17 years of the loan, we've been living rent-free for the last 5.5 years (except taxes and insurance, of course). There's no way we could have done better "cashing in" on the equity.

This is horrible advice to the homeowner.

Uncle Lar said...

Once you own your home free and clear its value is precisely that of what it would cost you to live elsewhere. Until then all you're doing is renting from the mortgage company. And yes you do build equity, but that value is either upon sale or as collateral on a loan.
And even free and clear really isn't as you still have upkeep, maintenance, and property taxes to consider.