Homeowners Are Borrowing Against Houses To Buy Stocks, Biggest Debt Binge Since 2008 Subprime Financial Crisis

Homeowners Are Borrowing Against Houses To Buy Stocks, Biggest Debt Binge Since 2008 Subprime Financial Crisis

borrowing against houses

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Betting on a sustained housing boom, homeowners are borrowing money against the value of their houses at the highest volume since the 2008 financial crisis. Many are using the borrowed cash for renovations as more people work from home during the covid-19 pandemic, but others are using it to buy stocks.

Homeowners withdrew $63 billion in equity through more than 1.1 million cash-out refinances in the second quarter of 2021 — the largest quarterly volume since mid-2007, according to data from mortgage analytics company Black Knight.

Home equity loans are a second loan borrowed on a house‘s equity. The equity is built up through repayment of the first mortgage and appreciation in value after its initial purchase.

Using a home’s equity to fund long-term assets such as starting a business, renovations or for leverage to buy another long-term asset such as a second home or investment property makes sense, said Susan Mitcheltree, a partner at wealth management firm Berman McAleer in Maryland.

“Using it to fund a short-term asset purchase like a car or to pay off temporary debt makes less sense,” Mitcheltree told Bloomberg.

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U.S. housing prices have been on a rise over the last 18 months, reaching the highest growth on record of 17.2 percent in June 2021, compared to June 2020, according to CoreLogic. The previous record for rising home prices was a 14.4 percent year-on-year gain in the fall of 2005, before the subprime mortgage crisis.

The U.S. housing market has been so hot that more than half of homes for sale have fetched over the asking price.

The price surge, coupled with ultra-low interest rates that made it possible to secure cash-out refinancing and end up with the same monthly mortgage payment, attracted homeowners in both the U.S. and the U.K. to borrow and buy bull stocks.

But borrowing against home equity increases the debt burden on homeowners and could leave them underwater if the value of the houses they borrowed against declines.

This is exactly what happened in the subprime housing boom that led to the housing bubble bust of early 2007, causing the financial crisis that wreaked havoc on the U.S. and global economy.

For many people, a cash-out refinance to invest in stocks may be too risky. Here are some cons of using home equity to buy stocks from mortgage news site TheMortgageReports:

  • There is no guarantee that stocks will increase in value short-term. If you need the money right away, you could have to cash out and take a loss.
  • The cost of cash-out refinancing is higher than rate-and-term refinancing. If you only get a little extra cash, you’re paying a surcharge on the entire loan amount — an expensive way to borrow.
  • By refinancing your mortgage, you’re extending the repayment period. That can cost more over the life of the loan, even if you get a good interest rate.
  • If you can’t keep up with your higher payments, you could end up losing your home to foreclosure.