Saturday, March 31, 2007

Home Equity Loan Buys Sports Car

People continue to borrow home equity loans to buy toys.

Today's Car Talk radio show caller bought a $14,000 used luxury sports car with home equity. The car had a bad transmission, but he was more interested in the Candy Apple Red color.

The big problem with the housing bubble is that not only did new buyers overpay for homes but also that existing home dwellers who had manageable mortgages embarked on spending sprees based on the imagined paper "wealth effect" of higher appreciation. They treated their houses as ATMs by taking out home equity loans or the similar Home Equity Line of Credit called HELOC. So, even people who had bought before the bubble and had good finances have endangered themselves by bubble behavior.

Appreciation can be temporary. Debt is certain.

The big mistake people make with debt is that they assume that present conditions or trends will remain the same ("I make enough for that payment."). Every scientist should know the danger of extrapolating current trends into the future and the uncertainty is why stock disclosures warn that past performance does not guarantee similar performance tomorrow.

Make your life easy by not volunteering to lock yourself into future burdens, especially unnecessary ones.

Yes, a broken $14,000 sports car counts as an unnecessary one.

No comments: