Your House is Not an ATM

A much advertised solution to current financial woes involves using your home to bail you out of trouble, by tapping into the equity available and presenting you with a sudden influx of cash. This can be a bad idea for several reasons.

The ATM Mentality

If you get in the habit of using credit cards to pay your daily bills and of habitually spending more then you earn, you have succumbed to the ATM mentality. Decide you're too tired to cook dinner? Let's have take-out.

Like that sweater in the window? Out comes the plastic. Want a new stereo system, or leather living room furniture? Loans are easy to get, and you can always pay them off later.

The problem with re-financing your home to pay off this kind of debt is that the extra cash doesn't fix the behavior that caused the financial trouble, just the results. Worse, since the habits aren't broken, the debt can quickly mount again - and you will have already played your ace in the hole. You have used your home in the same way as you use credit - as a quick fix that resolves nothing in the long run.

There is a very real danger in using your home as an escape hatch from the consequences of irresponsible behavior. If you are struggling to cut down on your bills, reduce your debt and become a stay-at-home mom, there are other avenues you can take to get out of debt that do not involve risking your home. Adding more debt to your situation is never the way to reduce debt.

The country as a whole is in a mortgage crisis due to mortgages being upside down. Too many home owners have used their homes as ATMs to the extent that the total amount owed is more than the house is worth.

Once you use the equity in your home, it is lost to you until you pay it back in, which can take years. In the meantime you have added to your monthly burden and added to your total debt in the form of interest on the new loan - which, if defaulted on, can cost you your home.

As with any rule, there are a few special circumstances when using your home equity mighty make sense. If you are in desperate need of a vehicle, you might get a better interest rate off of a home equity loan than you would from the dealership. Another scenario might include using the money to fix your home up for sale, although careful consideration should be used to ensure that the money spent will increase the home's value and will be recouped upon sale.

In most cases a refinance for the sole purpose of debt consolidation or a home equity loan is not necessary to reduce debt; there are other, safer avenues that will help you learn how to manage your finances and eventually free you from debt without the risk of losing your home.