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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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To: heartwood
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.

By living below your means, you can save 6-12 months of living expenses and keep it somewhat liquid. That's what I'm planning on after paying off the rest of my debt.

21 posted on 08/28/2005 12:07:45 AM PDT by inkling
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To: inkling

My husband was out of work for nearly a year a few years back - me pregnant, no recent work history, three children and then a newborn - so I didn't work - and we just about used up that cushion. Thankfully, he got a job in time. I'm not sure what we would have done else - he was over-qualified for "mid-level" positions though he sure did apply for them, and both of us working low-level jobs wouldn't have paid our expenses.

But definitely, live below your means, and save it up for that rainy day.


22 posted on 08/28/2005 12:33:46 AM PDT by heartwood
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To: heartwood

That can definitely happen to anyone! We'd be in the same boat if I were to lose my job today. It will take us a while to gt out of debt and sock away funds, but we're desperate to get there!


23 posted on 08/28/2005 12:36:33 AM PDT by inkling
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To: Roberts
It's even worse than you know. There are major scams going on all over the U.S. (1) Fraud by the mortgage brokers is just the tip of the iceberg. They run all kinds of games at closing. But they are clever. They let the escrow companies pressure home buyers to sign the papers. The papers contain wicked small print terms. (2) Then there are the people who get sucked into loan servicing scams. Usually happens after the lender sell the loan as a "CMO" on Wall Street. The buyer never receives timely notice of the new bank he is supposed to send his checks. His payments to the first bank are "lost" in accounting. Then one day he gets a letter sent certified that tells him he is three months behind. (3) Today illegal foreclosures have been elevated to an art. Many people don't even know what hit them.

Be very careful, people. It is going to be very nasty when bubbles start breaking all over the U.S.

24 posted on 08/28/2005 12:43:30 AM PDT by ex-Texan (Mathew 7:1 through 6)
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To: Roberts
From the article:

The couple attended seminars, began to educate themselves. They remortgaged their home to buy a three-bedroom in Visalia, then a two-bedroom cabin near Lake Arrowhead. More recently, they bought two houses in Colorado.
... Bandfield's goal is 10 properties, each yielding $1,000 a month above the mortgage and upkeep. That would nicely fund their retirement. "If we don't do anything," she said, "we're going to have nothing."


My guess is that these folks are going to end up having nothing. $1000/mo positive cash flow from a Lake Arrowhead cabin likely purchased with an interest-only ARM? What a pathetic fantasy.

As someone said above, this is going to end very, very badly.
25 posted on 08/28/2005 1:01:46 AM PDT by irishjuggler
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To: Roberts

Proverbs 22:7 - The rich rule over the poor, and the borrower is servant to the lender.

Proverbs 22:27 - If you lack the means to pay, your very bed will be snatched from under you.


26 posted on 08/28/2005 1:03:47 AM PDT by Chewbacca (Not all men are fools. Some are still bachelors.)
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To: Roberts
I agree. My wife and I always maxed our 401k/IRA contributions for about 30 years. With our employer match ratio(s) and got the tax deduction. People asked why we took a 15 year mortgage which becomes 14 years with the semi-monthly payments). Since I'm a business analyst and long rage planner: "Well, I want ZERO debt when I'm 65." So 10 years from now we'll owe ZERO to anyone.

Too bad the younger generation doesn't TRY to plan. They have to have those $150 Nikes, and torn stupid jeans at $40 a pop.

That's just us at 55 years old. We're fed up with our children's generation. Thankfully, our children are getting out of the MTV/VH1 mindset. I reminded my daughter that it cost us $200k for her education. I asked her when she was going to pay me back.....

27 posted on 08/28/2005 1:59:43 AM PDT by Cobra64
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To: Lancey Howard
There's a whole lot of people out there who are getting very rich .

On paper.

I remember all the "dot com boom" people who were getting rich, too.

I also remember when people were buying "Beanie Babies" as investments because they were going up so fast in value.

28 posted on 08/28/2005 2:27:20 AM PDT by NoControllingLegalAuthority
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To: Roberts

We'll see how savvy it looks when people are getting their houses taken from them left and right because they can't pay their debts through a market correction.


29 posted on 08/28/2005 2:45:59 AM PDT by thoughtomator (Hey Senator! Leave those kids alone!)
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To: Mr Ramsbotham
Excellent advice, we have always done this and now in retirement we live very comfortably. Wanting for nothing can be very rewarding. Stay close to God and spend close to the vest. Amen.
30 posted on 08/28/2005 2:57:27 AM PDT by gakrak ("A wise man's heart is his right hand, But a fool's heart is at his left" Eccl 10:2)
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To: Cobra64

Just think what will happen when these people retire. If you listen closely you can hear what will become a roar when they retire and have nothing and Social Security is not there. Like the Savings and Loan debacle of the 80's somebody is going to be paying for a big bailout and guess who that will be. It's the Ant and Grasshopper fable writ large.


31 posted on 08/28/2005 3:27:55 AM PDT by patj
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To: Paleo Conservative
If my house decreased by 50% it's still double in value.
32 posted on 08/28/2005 3:58:25 AM PDT by Caipirabob (Democrats.. Socialists..Commies..Traitors...Who can tell the difference?)
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To: Roberts
I like what Donald Trump said to his banks when they started harassing him for money. "deal with me or you will never see a dime of your money." I really have no sympathy for banks who loan fiat money at high intrest. And I must say that I do hope the economy takes a nose dive. Perhaps America will learn to throw out the international bankers and the government that supports them.

But I imagine that they will bow their knees to both when trouble comes and let the slaves collar be fixed even tighter.

33 posted on 08/28/2005 4:04:36 AM PDT by ColdSteelTalon
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To: patj
Like the Savings and Loan debacle of the 80's somebody is going to be paying for a big bailout and guess who that will be.

You may be right, but the trillions in debt issued by Fannie Mae and Freddie Mac (which has financed this binge) isn't technically guaranteed by the federal government. A year or so ago, John Snow said that Freddie and Fannie aren't "too big to fail."
34 posted on 08/28/2005 4:06:21 AM PDT by irishjuggler
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To: irishjuggler
technically guaranteed by the federal government.

OK, I'll buy that. However, you know that those guys in the Senate will want to get out in front with their calls for bail-out. You can hear it all now, "We can't let all these seniors live on dog food in retirement".

I've always compared these people to those in school who did all their assignments, stayed home and studied vs. those that went out and partied and missed deadlines and whine that they should get the same grade, or at least, passing grades. Those who are fiscally responsible will be made to pay for those who aren't.

35 posted on 08/28/2005 4:34:35 AM PDT by patj
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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.

More like two or three.

Sigh.

36 posted on 08/28/2005 4:35:37 AM PDT by mewzilla (Property must be secured or liberty cannot exist. John Adams)
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To: Roberts

A growing consensus, particularly amongst the general public, that a market, any market, is going to continue moving in the same direction indefinitely is a sure sign of a bubble that is getting ready to pop.


37 posted on 08/28/2005 4:44:45 AM PDT by Fresh Wind (It is Watergate yet? Is it Watergate yet?)
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To: Lancey Howard
"For example, lots of people have taken that cheap money and bought more real estate."

So you believe that now is a good time to invest in real estate? That I should take whatever equity I have in my house and invest it in the real estate market?

38 posted on 08/28/2005 5:56:09 AM PDT by robertpaulsen
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To: Chewbacca
I guess I am really not in with the hip real estate crowd, as I have taken my financial advice from such books as: The Richest Man in Babylon, The Wealthy Barber, True Prosperity, Financial Peace, The Millionaire Next Door. I sleep very well at night being debt-free, but that's just me.
39 posted on 08/28/2005 7:47:13 AM PDT by GnuHere
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To: robertpaulsen
So you believe that now is a good time to invest in real estate? That I should take whatever equity I have in my house and invest it in the real estate market?

That bandwagon may have already left town.
On the other hand, it's tough to go wrong investing in fertile ground - - they're not making any more.

40 posted on 08/28/2005 8:52:36 AM PDT by Lancey Howard
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