In the old days, people would tap their house for cash and take out a second mortgage without a second thought. Financial expert Mary Caraccioli says it's almost never a good idea. "Taking equity out of your home should be considered your emergency, emergency, emergency fund. Not your first line of defense or your second.
The problem with using your house as a piggy bank is that it puts your home at risk. Say you take out only $10,000 and you have a lot more equity in the house. Sounds reasonable. But then you get sick and can't pay back the loan. Your house is the collateral and you can lose it.
Caraccioli offers an example, a family she's featuring on her TV show, We Owe What? "This couple did everything right. They had college funds for their kids, retirement savings, two homes with 20% equity on both mortgages. They were living within their means."Then the husband got sick. They lost their income and because his illness couldn't be diagnosed, he couldn't get a payout from his disability insurance." Happily, he survived, but the family was building up debt at the same time the stock and real estate markets They lost both houses.
"You have to say to yourself, 'What if the worst happened? What would I do? where would I live?' You think the worst thing is losing the ten grand, but in fact the bank owns your home and can sell it to recoup the loan. Your credit rating is shot, so it can be hard even to get an apartment," Caraccioli says.
If you're facing a catastrophe - medical bills, say - there may be no other way out. You have to do what you have to do. But never ever use your house to pay for vacations or even a new kitchen.
"People can be tempted to pay off credit cards with a home equity loan to get a lower interest rate. That's a trap. The behavior that ran up those credit card balances will creep back despite your best intentions. Then you're worse off," says Caraccioli. "It looks like a better way to borrow money on paper, but you have to have incredible discipline."
What if it's an emergency? Caraccioli offers some creative ideas for coming up with the funds instead of a second mortgage. "Look around your house to see what you can sell - antiques, paintings. Ask yourself what skills you have the could bring in other income. Could you tutor on weekends? I knew a family who needed to raise money when their dog had a medical emergency. They did a fundraiser online and raised the money to get their dog's leg fixed."
For More Money Tips: Catch Mary Caraccioli's show, We Owe What? On Saturday at 5:30 Eastern/Pacific time on the Live Well Network.