The stock market is down, major corporations are slashing costs and employees, and yet consumers continue to spend, spend, spend. How do they manage to keep going? Economists say much of the spending boom is due to a huge wave of mortgage refinancing. Homeowners are taking advantage of a recent spurt in housing prices and lower interest rates to refinance their mortgages and take more equity out of their homes. While some of that equity is being used to pay down other debt, there is evidence that large portions are being used to buy things—big-screen televisions, refrigerators, cars, DVD players, and more.
So far this has been good for the economy as a whole. But what does it do to the homeowners? It may hurt their long-term financial plans. It may make sense to use cash from a refinancing to pay off expensive consumer debt, turning non-deductible interest into a tax deduction and reducing the interest rate. But spending home equity on non-durable consumer goods that will wear out and be discarded many years before they are paid off is sheer folly. A car that lasts nine years and then is sold remains on the debt list for another 21 years if a 30-year mortgage is used.
And what about the higher mortgage payments that ensue? It may seem like a bargain to pay just another $200 a month in order to have access to $30,000 now. But what happens if the economy really slumps and you lose your job or your family income is cut back?
If you can’t afford to buy something now without tapping home equity, try to do without it. Let the other fools prop up the economy and avoid the trap of over-borrowing.
