Refinancing One's Home

I saw an article in the news this week of an unfortunate woman who had lost her home after refinancing. She had apparently been unable to make the payments on the refinancing loan.

It is remarkable how many people seem to think that once a home has appreciated in value, the increased equity is somehow the equivalent of free money. It isn't. As long as the owner lives in the home, he or she is using the appreciation. To both live in the home and borrow against the equity is to use the appreciation twice, and the second use is an additional burden that must be repaid, usually beginning right away in the form of monthly payments. The home equity loan is a burden just as a personal loan of a similar amount and terms would be if the property had not appreciated. Indeed the appreciation tends to make homeowners more giddy and banks more accommodating, so home equity loans are likely to be larger and thus more burdensome than unsecured personal loans. And of course it's easier for the homeowner to lose the house in case of default.