Santa Isn't Coming This Christmas Because There Isn't Any Home Equity to Tap Into

Santa Isn't Coming This Christmas Because There Isn't Any Home Equity to Tap Into

If this article at CNN doesn’t illustrate how screwed up people are when it comes to money, I don’t know what does. I keep hearing the argument that mortgage brokers are evil and have caused this real estate mess, and while that may be true, for every bad broker, there are just as many cases of people who are ridiculously irresponsible. Of course this doesn’t surprise me considering that I’ve heard advertisements telling people not to bother saving and to just use the equity in their homes.

Take this scenario that the CNN article describes:

Jackie Castleberry won’t be playing Santa Claus this year. She usually buys her grandchildren, nieces and nephews lots of gifts around the holidays — bicycles, educational games, clothes — but this year she is just struggling to keep her North Las Vegas, Nevada, house.

The interest rate on her four-bedroom home loan shot up in October and she is $6,000 behind on her payments. She now owes $168,000 on her home, which once was worth $220,000 but is now worth about $150,000.

In the past, when times were tough, she would borrow against her home’s equity — that’s no longer possible.

Ok, let’s back up a second. First of all, it says she is $6,000 behind on payments, and owes $168,000 and the house was recently worth $220,000. It doesn’t say how much she initially borrowed, but assume she borrowed $200,000. Depending on the terms of her ARM, on a loan of that rough size, at a lower rate she was probably paying anywhere from $900-$1,200 per month. Even if her rate shot up to 10%, her payment would likely be in the $1,500- $1,800 per month.

Assuming the worst-case scenario, her mortgage payment may have jumped by $1,000 per month, and that is almost double. Even so, the rate went up in October. She has made at most, 3 mortgage payments since the increase, but has probably made two payments so far. So unless her mortgage payment went up by 200% or more, there is no way the rate hike alone could cause her to be $6,000 behind.. While not impossible, it is very unlikely.

According to an MSN article:

Let’s look at a three-year ARM on a $200,000 mortgage. Taken out in 2003 at a rate of four percent, the monthly payment was $955. Now, the rate could jump as high as 7.6 percent, boosting the payment to $1,375, a 44 percent increase.

This is a much more typical example, so using 10% was just to show how much it would take to force someone to get $6,000 behind in just a few months. Either she has been behind on her mortgage well before the rate increase, or she has borrowed every penny of equity possible and can’t even keep up on those payments.

Using Home Equity Like a Savings Account

The final note that I emphasized in that article is how she stated that when “times got tough” she would just tap into the equity in the home. This leads me to believe that times got tough a lot, and if she had a $900/month mortgage and was still falling into trouble paying the bills, she shouldn’t be in a house to begin with. Granted, it looks like she has changed jobs and might not be making as much money as she used to, but you can’t just drain your home equity and then complain about your payments. You need to either try to increase your income to get back to the point where you can pay the bills, or seriously consider a change in your living arrangements.

Even more troubling is that this is fairly widespread:

Castleberry is just one of thousands of homeowners nationwide who can no longer finance their spending by tapping into their once inflated, now depreciating home equity.

Well, if you are financing your spending and buying things like Christmas gifts by pulling equity out of your home, I’m sorry, but I am not going to feel bad for you. This type of behavior isn’t the mortgage broker’s fault and it isn’t the interest rate’s fault. This is just an extremely irresponsible use of money.

At Least Some People are Able to Learn From Their Mistakes

Money’s also tight for Deborah Vick, a Las Vegas home loan officer who says she’s cut back on spending since the housing slowdown took hold and cut her salary in half. She used to have a BMW and a Land Rover, but had to give up the BMW to a company that took over her $600 a month lease.

“If you have to give up a luxury item, which you probably shouldn’t have purchased in the first place, you know, for me it was a learning experience,” she said.

It is too bad more people can’t own up to their mistakes and simply take it as a learning experience. Instead, we hear all of these stories about how it is all someone else’s fault that some people can’t keep up with their bills. But if you bought a house that you could hardly afford to begin with, and constantly sucked every penny of equity out of it, maybe you should step back and look at what happened and how you can improve it.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

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