As home values go down, many people are seeing why consolidating consumer loans into a home equity loan is a bad idea. Lets say you bought a $5,000 television system on your credit card and later consolidated that debt into a loan backed by your $150,000 home. As the market has dropped, your home may only be able to sell for $120,000 now. So if you originally owed $150,000 on your home, you know owe $155,000.
If your job moves and you need to sell your house, you will have to take a loss of $35,000. Unless you have a way to come up with that money, you can’t sell your home. When you go to closing, the paperwork can’t be completed unless everyone gets paid what they are owed. Since there is a $35,000 difference between what you owe and what the buyers will pay, you have to make up the shortfall. There aren’t a lot of options available to you. Your television is probably worth considerably less, so selling it isn’t an option–or at least isn’t an option that is likely to give you any reasonable amount of equity.
As you can see it is best to not owe money on things that depreciate. Homes can go down in value. In the long run they will probably appreciated, but don’t stake your financial future on an assumption that your home will appreciate over a short period of time.
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