A good idea? Or just one more new way to mess up your future?

There is this new type of home equity loan that is getting some press and I haven’t fully grasped why anyone would do this except to simply take money and walk away later… Much like the HELOCs of past years, etc, etc… In this new type of equity loan you get a certain percentage of your homes value right now in cash and essentially sign away 50% of your home’s future appreciation or conversely depreciation to the lender. You make no payments for the loan until you sell your house at which time you pay back the amount of cash they gave you PLUS that 50% of the equity gain. Sounds great eh? But wait… This COULD work out for you if you’re sure that prices will go down until you sell your house.  But if your house appreciates over time and you sell it, you have to give up half of the equity gain since signing the loan agreement to that lender. Depending on your timeline for selling your house and whether you need all of the equity gain in it to support some future need like moving into a retirement home, etc… this could be kind of a good deal or a really bad deal. The “kind of a good deal”  side of things assume you do something meaningful with the money like improve your house so the price will be higher in the future or send the kids to college or invest it something that gains greatly over time or whatever. The trouble is that most people will not do that. They will blow the money on vacations, cars, toys and then have to give up even more in the future when their house appreciates in value. My gut is telling me that this is yet another baaaaaad idea. Its tempting to get some money now and not have to make any payments on it for years, but the reality is that you’ll likely pay for it many times over when you have to pay the initial amount back PLUS give up some equity in your house. Remember, there are no free lunches and the lenders that offer this surely dont have YOUR best interest in mind. I think everyone should have learned that by now.

In summary, regardless of which way the housing market moves, when you sell your house you pay back the loan in full to the lender. They are betting that the market will go up over time and betting that up years will outnumber down years which historically is true (about 6.5%/yr for the past couple decades). You aren’t betting anything, rather you are taking “easy” money now and you are likely to get screwed either way down the road. You get screwed if the market goes down because you lose value in your house. Yes, the lender will assume half of that downside but YOU are still down! You get screwed if the market goes up because you have to give up half of the gains.  So, again.. how is this good for you? I have no idea… I must be missing something…

What do you guys think? Is there some instance where you think this is a great idea?

Here is the story explaining the new loan type:



~ by razor on June 19, 2008.

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