A house is not a piggy bank

One of the driving causes of the mortgage mess, as I see it, is the idea that equity in a home is useless unless it is collateral for a loan. Think of all the variations of the loan sales pitch on the theme: unlock the equity in your home. “Your equity can finance a vacation, a new car, a way out of credit card debt.”

There is something superficially comforting about borrowing money against your house. If you spend cash you’ve saved, the cash is gone, your bank balance is less. The consequence of spending is obvious.

If you tap the equity in your house (another comforting metaphor) you still have the house. It appears little has changed and you now have whatever it is the loan proceeds bought you.

But you also have a 15-30 year obligation to repay that loan, a loan on which the interest paid over the life of the loan will exceed the loan proceeds several times over. If a bump in your financial life makes it impossible to pay the loan, you can lose your house altogether. Foreclosure wipes out whatever equity remains in the house and leaves you without shelter, which is the primary purpose of a house in the first place.

There are undoubtedly purposes for which a home equity loan is a sound choice, but sound choices are hard to make  when surrounded by the noise of home equity line of credit sales pitches promoting fuzzy thinking. The mortgage broker gets his commission whether or not you keep your house.

Your house may be a big item on your personal balance sheet, but it isn’t interchangeable with your piggy bank.