Is The Decline In Our Economy Due To Home Equity Loans?

Years ago banks introduced home equity loans as a way for home owners to take money out based on the equity in their homes

. There was no limitations as to how this money could be spent and many home owners leaped at the opportunity to cash out their equity and place money in their banks.

It is believed that the introduction of the home equity loan is the reason for the recent recession that is happening in our country. When homeowners took out these loans some spent the funds to remodel or fix up their homes in order to increase their property value. Others used the funds to make a down payment on the purchase of a new or second home. Their were some that took out their loans to fiance the college education of their children or pay off outstanding credit card debt. Then their were those that took out these loans to buy expensive new cars, or to take extravagant vacations.

With the introduction of this loan came two options. The first was a straight forward home equity loan, the second was a home equity line of credit. The home equity line of credit allowed people to write checks against a credit line and make a specific payment amount according to the amount borrowed. These loans came with an adjustable rate that changed when the interest rates did. They were very dangerous loans to have as not only could people not afford to pay them back when interest rates went up, but it was very simple to make a purchase that they may have otherwise not been able to afford.

The funds that were received from these loans and equity lines were used irresponsibly and many did not really understand the payback agreement terms, they just spent and spent. Once people realized that refinancing your home offered a better rate then this is the route that many home owners turned to. They refinanced their homes, leaving their homes without equity and themselves without any net worth.

Once the economy became poor, and banks started to have financial problems, they immediately closed out all equity loans and lines or credit. Although those that already had one were safe from this, these individuals had spent all the money they were allotted. Many homeowners were furious to find out that money they had to trusted to always be there was no longer available to them, especially when they needed it the most. What I hope these individuals have come to realize is that this was a blessing in disguise to them.

by: Jackie Smith

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