Your Home is NOT an ATM or Bank

By
Real Estate Agent with GreatWest Realty DRE# 00827565

 

Many Real Estate Professionals, have witnessed a repeated theme, when they hear troubled homeowners stories these past several years.  It is the overwhelming number of homes with either a second mortgage added, or a total refinance at some point during the duration of ownership. Essentially homeowners came to believe their house was a ATM or 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 currently 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 perspective after hearing troubled homeowner experiences, is that the public needs to become more informed 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.

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Show All Comments
Rainmaker
63,317
Douglas Trudeau
Tierra Antigua Realty - Tucson, AZ
MBA, Assoc. Broker, Selling Tucson Real Estate

It amazes me on how some people think when it comes to their homes. Clients I warrned not to take out equity loans failed to listen and lost their homes. Others plan on staying for a long time and are paying down their debt. It all boils down to personel value, perception, and that evil thing that lurks around of impatience.

Mar 13, 2011 06:54 PM #1
Rainmaker
180,221
Brenda Whitman
CENTURY 21 Real Estate Center, Inc., Laramie, Wyoming - Laramie, WY
Associate Broker, Laramie, Wyoming

Whatever happened to common sense and the idea that if you can't pay for it outright- then you probably don't need it?!  IMHO, cars and homes are the only things that should be financed.  For everything else, you should save for it, then buy it when you have the actual cash to pay for it.  But that's just me.....:-)

Mar 13, 2011 07:12 PM #2
Rainmaker
344,413
Rodney Mason
Prospect Mortgage - Atlanta, GA
FHA 203K, USDA, VA, HomePath Renovation Specialist

You are right on target.  A lot of the home owners who did get foreclosed upon did treat their homes as piggy banks.  Those are often the same ones now saying they were taken advantage of.  The interest detectability is a good question.

Mar 13, 2011 07:16 PM #3
Ambassador
1,327,563
Richard Iarossi
Coldwell Banker Residential Brokerage - Crofton, MD
Crofton MD Real Estate, Annapolis MD Real Estate

Myrl,

I've done some due diligence for buyers by investigating distressed home mortgages, which are online here in Maryland. Some of them have had five or six cash out refi's in a couple of years. Banks are making money on this practice, and they just don't care.

Rich

Mar 13, 2011 08:27 PM #4
Rainmaker
609,349
Sheila Newton Team -- Anderson & Greenville SC Real Estate
Berkshire Hathaway HomeServices - C. Dan Joyner - Anderson, SC
--Residential/Short Sales/Foreclosures

I have never liked the cash out refi... I think they are a bad idea for the most part. And the old 120% of the value of your home 2nd mortgage was just plain dumb!

Mar 13, 2011 09:48 PM #5
Ambassador
1,511,867
Tammy Lankford
Lane Realty - Eatonton, GA
Your Lake Sinclair Expert (706-485-9668)

I hope those days are past where people pull cash out... but maybe the banks didn't learn a lesson.

Mar 13, 2011 09:50 PM #6
Ambassador
1,283,100
William Johnson
RE/MAX Associates - San Diego, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE

Hi Myrl,  I am glad that I am not deciding this, there have been so many that have benefited ( by not handing over more of their income which has ben sheltered through this exemption) from some of their creative mortgage activities. But the premise of the question has to based on whether our earnings are actually ours and then we contribute a share to tax revenue or if the earnings are actually not ours and we have to defend the portion that we keep. Once that is decided ( no one actually likes to answer that one). There is a line of thinking that is very broad. At either end, one being conservative and the other being liberal there are remarkably different answers. Neither extreme enjoys a majority however. In society we contribute to the whole for health and safety, infrastructure and protection. But there are thousands of other programs thought worthy that go beyond that. Therein lies the rub. This largest exemption ( home mortgage ) of the shared contribution seems most at risk the closer we get to the more liberal end of that line of thinking requiring more and more funds and the increase in government size to manage it. The four choices you gave have to be answered in the context of the original question. It is not as easy as one might guess.

This is an excellent post and I think it really deserves to be featured.

Mar 14, 2011 11:43 AM #7
Rainmaker
478,061
René Fabre
First American Title - Seattle, WA
New Media Marketing

Most everyone I know is upside down... I remember a time though, especially on what we call the Eastside (Bellevue, Redmond, Kirkland). Many who got into homes in the 80's and 90's refinanced every couple of years to sustain a lifestyle that was above their income. The homes appreciated substantially for years so indeed, they were ATM machines. That's one of the reasons this recession has been so brutal... Many here in the Northwest thought that we'd be excluded from the down turn and homes would keep appreciating every year forever... Wrong!

Mar 14, 2011 11:47 AM #8
Ambassador
838,934
Connie Harvey
Pilkerton Realtors - Brentwood, TN
Realtor - Nashville TN Real Estate

Myrl, when Nissan came to Tennessee a few years ago from California it was the first time I had heard of people using their home's equity as an ATM machine. I was rattled about it then. now after the financial meltdown, there should be rules against it!

Mar 14, 2011 03:43 PM #9
Rainmaker
1,139,217
Myrl Jeffcoat
GreatWest Realty - Sacramento, CA
Greater Sacramento Real Estate Agent

Douglas - I think when there appeared to be no end to the increased values of homes in a short amount of time, folks began to evolve their thinking differently.  This crisis we are in, has shown many the error of our ways. . .Hopefully!

Brenda - There is a mantra I'm living by more, "SIMPLIFY."  You are absolutely right about us not needing everything we think we do. 

Rodney - I remember one particular homeowner, who had piggybanked their home and bought an RV, a boat, a small airplane, and flying lessons.  It was insane.  They loved their home, and managed to save it by paying off the second mortgage.  How did they do it?  By selling the plane the boat, the airplane, and a very reduced amount, because they were used, and it is an economy in decline.

 

Mar 14, 2011 11:55 PM #10
Rainmaker
1,139,217
Myrl Jeffcoat
GreatWest Realty - Sacramento, CA
Greater Sacramento Real Estate Agent

Rich - Seriously, five or six cash out refi's???  That's absolutely crazy!  You're right, banks DON'T CARE!

Shiela - I think hard lessons have been learned by many these past few years.

Tammy - The banks don't need to learn lessons, as long as taxpayers end up bailing them out for their insanity.

Mar 15, 2011 12:19 AM #11
Rainmaker
1,139,217
Myrl Jeffcoat
GreatWest Realty - Sacramento, CA
Greater Sacramento Real Estate Agent

William - Sometimes I think the needs of the ultra right and the ultra left get addressed, while reality is ignored.  I think because of this the middle class has been heavily decimated in the process.

Rene' - I understand there are areas of the country, which more than half of the homeowners are upside down.  Most had nothing to do with creating the problem.  They bought a home in good faith, and have managed to hang onto their jobs.  Yet, they have watched their home values plummet to only half what they were 5 years ago. 

Connie - I can imagine to those in Tennesse, seeing that occur was a shock.

Mar 15, 2011 12:27 AM #12
Rainmaker
412,175
The Scott Loper Team Lansdale & Harleysville PA Homes
Keller Williams Real Estate - Montgomeryville - Lansdale, PA

Hi Myrl,

It is this exact mentality that got so many homeowners in trouble.  We are such an instant gratification society.  Too much conspicuous consumption.

Lisa

Mar 15, 2011 05:19 AM #13
Ambassador
1,738,042
Barbara-Jo Roberts Berberi & Corinna Birgit Cromartie
Charles Rutenberg Realty - Palm Harbor, FL
Palm Harbor & Dunedin FL Residential Real Estate

If people would have realized that a few years ago, we would not be having all of these short sale problems today! Great post!

Mar 15, 2011 11:11 AM #14
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Rainmaker
1,139,217

Myrl Jeffcoat

Greater Sacramento Real Estate Agent
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