Real Estate Blog - A House is Not a Bank!

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A House is Not a Bank!

There is a repeating theme I have noticed as I hear troubled homeowner stories these last couple years. It is the overwhelming number of homes with either a second mortgage added, or a refinance at some point during the duration of ownership. Essentially homeowners came to believe their house was a bank.

Reasons for these refinances and second mortgages vary. There are those who simply wished to take advantage of available lower interest rates at one point or another. But, an over-whelming majority of folks in hot water with mortgages are those who added considerable debt to their homes by purchasing cars, boats, home additions, pools, vacations, and even airplanes to a refinance or a second mortgage.

In the last couple of decades there has been a trend for homeowners to think the lower mortgage interest rates available for homes and the ability to spread out the debt over more years had been an enticement for financing these other assets into the home mortgage debt. There was another important reason, as well - the mortgage interest tax deduction.

So, here's the question of the day:

(1) Should the tax deduction on mortgage interest be calculated on a base amount calculated on the home purchase price?

(2) Should the tax deduction on mortgage interest be calculated on base purchase price plus any home improvements, which would increase the value of the home?

(3) Should the tax deduction on mortgage interest be eliminated outright?

(4) Should the tax deduction on mortgage interest remain intact as it is?

My own view after hearing experiences of troubled homeowners is that the public needs to become better educated about the risk of adding debt to the home mortgage. After all should homeowners get into hot water with their mortgages, they risk losing their mortgage tax deduction - when they lose their home.

By having outside debt added to the mortgages, homeowners often harm their opportunity to refinance to lower interest rates - especially if home values decline because of market conditions, and they are left upside down in home value. When coupled with job loss, they are looking at potential disaster.

Posted by Myrl Jeffcoat on 06/08/2009 08:55 AM

Comments (17)

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17 Comments on A House is Not a Bank!

JUN

Several years ago, in my previous life in Corporate America, our 401K fund manager held an investment workshop. He mentioned that he took out equity on his home to invest in the stock market.

Interest rate at 8% (at that time) and the stock market average at 12%, it's a no-brainer of a 4% gain.

What he failed to evaluate the taxes and risks involved.

Years later, I'm glad my instincts told me that was a HORRIBLE IDEA.

My house is not an ATM machine.

Good Morning Mary, This is a great post today and you've made some valid points. My grandmother always told me, you don't buy what your can't affort. This hasn't been the case these last few years, people are douped into believing/thinking they can affort the second mortgage. Shame on the banks/lenders

Patricia Aulson/Portsmouth NH Real Estate

Good Morning, Myrl... Our house is paid for and we would never use it as an ATM machine.

To answer your question, I'm not sure but I will say #4.

Should the mortgage interest deduction be disallowed for anyone that has a foreclosure on their record? That might encourage some to make their payments and do what it takes to honor their debts.

Follow me on Twitter: http://twitter.com/roykelley

Myrl, Those are the people that got their money out of their homes and caused the market to tank. The do have the boats and motorhomes and are giving up their houses. They should be the ones that get penalized, not everybody else. I don't believe those people are motivated by the tax benefits rather by the easy money available to them. I'd say leave it alone and figure a clawback measure to have these abusers pay for their lack of ethics and morals. Hard to do so I guess I'll just sell something today.

Myrl, for many it's time to "pay the piper." And, now that homeowners can no longer use the home ATM, they've switched to their credit cards. What we need is an "attitude adjustment" not a government Band Aid.

ToulaRosebrock,com

Hi Myrl:

You make some great points here...

Simply put, a home is not a bank.

This is the quote of the day!!!

My mom is still in the house that my parents bought way back in 1968. It was their first and only house. They raised their family in the house and my dad died in the house. Mom will probably be there until the day she dies, and then my older brother has dibs on it.

If we could get this generation to understand that a house is to be made into a home, and lived in, and raise a family in, and watch the kids get married in, and have the grandchildren come visit in, and die in, the real estate industry and the economy would be better.

Of course, that means that Realtors wouldn't have Sellers every two years, so we might have to work harder, too. It's a vicious cycle. Encourage your Clients to say put for eight years instead of buying and selling every two years and lose thousands of dollars in commissions.

Myrl - I would go with something of a blend of 2 and 4 (and no, I don't mean #3) But that blend would have to be something on the order of additional debt that is applied to increase the value of the home, which would exclude maintenance and decor.

Interestingly, though, even since Clinton was president, I have been hearing by many counselors not to use your home to pay for anything other than your home.

Loreena - I think many folks will look at their homes a little differently after this.

Patricia - I was brought up with those values also. I may have deviated slight from it over the years, but slowly migrated back to my parents way of doing things.

Shirley - That's a good position to be in. The only thing you need to be concerned about now is that you are fully insured.

Roy - You pose another valid question.

Jim V. - Those that took equity out, are only part of the larger problem. Personally, I think it was packaging and repackaging of mortgages on the secondary market, selling them as derivatives. But it became a far riskier, murkier situation when they packaged in toxic mortgages with regular mortgages and sold them in the swamp waters of credit default swaps. It was like playing Musical Chairs with switchblades.

John - I'm very concerned about the credit card industry in the future.

Toula - Houses definitely shouldn't be looked at as a bank!

Jim F. - It is wonderful about your parent's home. Now let me tell you a flipside story. I know a house that was bought by a couple back in 1963. They paid it off, and when they became aged, they moved a grand-daughter and her husband in to help with their care. Over the course of a few years, the grand-daughter was placed on the deed, they refinanced, bought the RV, a boat, bought land in Oregon, and got interested in horses. This last month, everyone moved out of the house leaving it to the bank. They are vastly upside down on that house. What a shame! The house fell victim to the mantra, "I want it all, and I want it all right now."

Mike - I like that blend too of #2 and #4 too. I think a lot of folks realize that a home needs to be off-limits to most other kinds of debt.

Myrl, my daughter got her first house as a foreclosure. I went with our atty to do the title search. Turns out the home had been refinanced over 12 times in a matter of a very short period of time, and over $200,000 what the original purchase price was. The thing is, for the $200,000 they took out, one would think it should have been the Taj Mahal, but.. NOPE. So, are they driving in huge fancy cars? Did they have a 5000 inch flat screen tv in the place? I don't know where the money went. Shame on the brother in law Countrywide Mortgage guy (small town here) and shame on the lenders... shame on everyone.

I vote for #4.

Andrea - That must be a record having 12 refinances in a short period of time. . .Amazing!

JUN

A house is not a home.

Home is not a building. It's a feeling.

A house is not an ATM.

Anymore.

A house may be where your money is.

A home is where your heart is.

If your heart is where your money is: Now aren't you lucky.

Jim - What timely prose that is:-)

I won't fault a home owner for refinancing or adding a second mortgage to do a home addition, add a pool, etc., because those add legitimate value to a home. It's when they use their home equity to go on vacation, buy a new car when the old one was perfectly fine, put plasma televisions in every room in the house including all the bathrooms, kitchen, garage, laundry room, and covered patio. Although some of those things can make a house a home, they don't add any value to the house, just emotional value to the home owner. I'm a firm believer that home equity should be used only for things that add physical value to a home.

Jim - My thoughts are lockstep with your's!

JUN

Myrl- This is an EXCELLENT post!!! Keep it up!

-John

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