Home Improvements Loans Are A Bad Idea

By Author: Lawrence Roberts
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Most homeowners do not save money for major improvements and required maintenance, and these homeowners often take out home equity lines of credit as a method of mortgage equity withdrawal to fund home improvement projects. The logic here is that renovations improve the property so an increase in property value offsets the additional debt. This is a bad idea.

Mortgage Equity Withdrawal or MEW is the process of obtaining cash through refinancing residential real estate using the accumulated equity as collateral for the loan. Before MEW homeowners would have to wait until the property was sold to get their equity converted to cash. Apparently, this was deemed an inefficient use of capital, so lenders found ways to "liberate" this equity with home equity lines of credit or cash-out mortgage refinancing. Home equity lines of credit are popular with lenders despite the additional risk of being in the second or third lien position because borrowers are less likely to default or prepay than non-cash-out refinancing.

Home improvement projects rarely add value on a dollar-for-dollar basis, particularly with exterior enhancements ...
... which often only return 50 cents on the dollar in value. The home-improvement craze was so common during the Great Housing Bubble that the term "pergraniteel" was coined to describe the Pergo fake wood floors, granite countertops, and steel appliances that defined the Great Housing Bubble era in much the same way as shag carpeting and wood wall paneling defined the interior decorating of the 1970s.

MEW has been utilized by homeowners for home improvement for decades, but the widespread use of this money for consumer spending was largely an innovation of the Great Housing Bubble. Since consumer spending is almost 70% of the US economy, mortgage equity withdrawal was the primary mechanism of economic growth after the recession of 2001, a recession caused by the deflation of another asset bubble, the NASDAQ technology stock bubble.

Mortgage equity withdrawal is generally a bad idea. It adds to mortgage debt and reduces a borrowers net worth. It may be prudent to borrow 50% to 70% of a home renovation project with a home equity line of credit as this much borrowing will be offset by the value added to the property. Realistically, few will want to pay cash for home improvement projects and they will borrow the full amount whether it is a smart financial decision or not.
About Author:
Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: http://www.thegreathousingbubble.com/
Read the author's daily dispatches at The Irvine Housing Blog: http://www.irvinehousingblog.com/ Visit Home Improvements Loans Are a Bad Idea.