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Homeowner Debt Increasingly Seen as Savvy Strategy
L.A. Times ^ | 8/28/05 | David Streitfeld

Posted on 08/27/2005 11:08:50 PM PDT by Roberts

Homeowner Debt Increasingly Seen as Savvy Strategy # Mortgages used to be something people strove to pay off. Now they've become income tools -- but risky ones, some financial analysts say.

By David Streitfeld, Times Staff Writer

As they happily watch their houses swell in value, Americans are changing their attitudes toward mortgage debt. Increasingly, a home is no longer a nest egg whose equity should never be touched, but a seemingly magical ATM enabling the owner to live it up or just live.

Homeowners took $59 billion cash out of their houses in the second quarter, double the amount in the 2004 quarter and 16 times the average rate of the mid-1990s, according to data released this month by mortgage giant Freddie Mac.

People are cashing out so quickly that the term "homeowner" may soon be inaccurate. Fifty years ago, Americans owned, on average, three-quarters of their house and the lender owned the rest. These days, it's approaching an even split.

This spend-now-rather-than-save-for-later phenomenon has produced undeniable benefits. Experts attribute much of the nation's economic growth to cash-out refinancings, home equity loans and other methods of tapping rising home values. And additional real estate investments financed by home equity have contributed to the rising home prices that bring owners such pleasure.

But the spending spree has a price. With the savings rate at zero, consumers' eagerness to tap home equity is only worsening their retirement outlook, financial advisors say.

If mortgage rates rise sharply or home prices fall, many homeowners could be in financial turmoil. They may be unable to service their loans, or even could find that their homes are worth less than their mortgages.

(Excerpt) Read more at latimes.com ...


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This is not going to end pretty.
1 posted on 08/27/2005 11:08:50 PM PDT by Roberts
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To: Roberts

My house is paid for but I guess if I want to be in with the in crowd, I'd better get a mortgage.


2 posted on 08/27/2005 11:11:45 PM PDT by Graybeard58 (Remember and pray for Sgt. Matt Maupin - MIA/POW- Iraq since 04/09/04)
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To: Roberts
If mortgage rates rise sharply or home prices fall, many homeowners could be in financial turmoil. They may be unable to service their loans, or even could find that their homes are worth less than their mortgages.

If you thought being upside down on an auto loan was bad.

3 posted on 08/27/2005 11:13:41 PM PDT by Paleo Conservative (France is an example of retrograde chordate evolution.)
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To: Roberts
Debt is Debt.
Some folks forget that with mortgages, line of credit, and re-fi's
4 posted on 08/27/2005 11:14:33 PM PDT by HonkyTonkMan
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To: HonkyTonkMan

It amazes me the number of folks who view their home as a savings account. This is going to end very badly, IMO.


5 posted on 08/27/2005 11:16:01 PM PDT by Roberts
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To: Roberts; HonkyTonkMan
It amazes me the number of folks who view their home as a savings account. This is going to end very badly, IMO.

The root word of "bankruptcy" is "bank".

6 posted on 08/27/2005 11:17:43 PM PDT by Paleo Conservative (France is an example of retrograde chordate evolution.)
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To: Paleo Conservative

Yeah, and the dot.bombers thought they'd created "the new economy". Funny how everything old becomes new again. "2-paychecks-from-foreclosure" isn't nullified by "consumer confidence" and reckless credit card spending.


7 posted on 08/27/2005 11:22:34 PM PDT by steenkeenbadges (Behold a pale horse.)
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To: Roberts

I knew a guy with probably 10's of millions of dollars of rental properties and his advice was do what you have to but in the end have at least one house that you live in that is paid for in full.


8 posted on 08/27/2005 11:23:03 PM PDT by agitator (...And that no man might buy or sell, save he that had the mark)
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To: agitator

Intelligent use of leverage can be a good thing. The "intelligent" part of that equation seems to be lost on many people.


9 posted on 08/27/2005 11:25:26 PM PDT by Roberts
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To: HonkyTonkMan

Debt is not all the same debt. If you can't pay for your credit card purchases, they can't take your home.


10 posted on 08/27/2005 11:28:52 PM PDT by heartwood
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To: Graybeard58
Oh, poo. I have two houses, paid off - I will leverage the rest, as I will.

It is just capitol - any entreprenour moves money!

11 posted on 08/27/2005 11:33:18 PM PDT by patton ("Hard Drive Cemetary" - forthcoming best seller)
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To: heartwood
You are correct to an extent. However it's still debt owed by the consumer. You trade in high-rate cc debt for extended terms against a mortgage.

More disturbing is the interest only loans folks are taking. As the market cools and interest rates rise, living paycheck to paycheck is going to get tougher and tougher.

I like the advice of another poster - have one home you can fall back in if need be.

12 posted on 08/27/2005 11:33:18 PM PDT by HonkyTonkMan
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To: HonkyTonkMan

Better yet, live below your means.


13 posted on 08/27/2005 11:36:09 PM PDT by Mr Ramsbotham (Laws against sodomy are honored in the breech.)
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To: heartwood

Not directly, but if someone is in over his/her head with debt, their home will be at risk via a judgment recorded against their property. Furthermore, it is unbelievable that people can't see the wisdom of eliminating debt as an end unto itself.


14 posted on 08/27/2005 11:36:15 PM PDT by Roberts
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To: Roberts
Intelligent use of leverage can be a good thing.

True if it's certain an investment will go up. Foolish if it holds steady. Fatal if heads down.

15 posted on 08/27/2005 11:37:20 PM PDT by Reeses
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To: Roberts
If you're elderly and don't have any heirs, you can use the house as a piggy bank via a reverse mortgage. Everything's paid back when you die through the sale of the house. Then it makes sense to get one.

(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
16 posted on 08/27/2005 11:38:21 PM PDT by goldstategop (In Memory Of A Dearly Beloved Friend Who Lives On In My Heart Forever)
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To: Roberts

Millions will be crushed.

Sheer idiocy.


17 posted on 08/27/2005 11:41:27 PM PDT by tomahawk (Proud to be an enemy of Islam (check out www.prophetofdoom.net))
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To: Mr Ramsbotham
Better yet, live below your means.

That's so 1960's. It's uncivil for folks today to live below their means.


18 posted on 08/27/2005 11:42:05 PM PDT by HonkyTonkMan
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To: Graybeard58
My house is paid for but I guess if I want to be in with the in crowd, I'd better get a mortgage.

I would. Where else you gonna borrow tens or even hundreds of thousands of dollars at about 5.5%? That's real cheap money. Wait a few years until the economy takes its inevitable, cyclical dive, and invest the same money in high-yield bonds at, oh 8% or 10%. Heck, maybe those money-market accounts that paid 20% in 1980 will return.

Or, if you are a smart and savvy investor, you can take that 5.5% money and invest it in smart and savvy (if slightly riskier) ways NOW and earn more than 5.5% on it.

For example, lots of people have taken that cheap money and bought more real estate. The value appreciation of real estate over the past few years (in most areas) has equated to way, WAY more than the annual rate of 5.5% on the money that financed the purchase.

There's a whole lot of people out there who are getting very rich .

19 posted on 08/27/2005 11:46:46 PM PDT by Lancey Howard
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To: HonkyTonkMan

It would be a tough call, if you were out of work and had used up your savings - refinance your home and try to tide yourself over until you could pay the bills, or run up your credit cards.


20 posted on 08/27/2005 11:46:50 PM PDT by heartwood
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