I have had more than one client take out a home equity loan for a specific purpose, only to find later that they made no use of the money. In one case, my client took out a home equity loan to begin the business of flipping properties in Houston, Texas. Another took out a home equity loan with the intention of developing an empty lot that they owned.
The first gentleman simply decided that he no longer wanted to engage in the business of flipping properties. The second gentleman, well apparently he had a great deal of fun. (What happens in Vegas stays in Vegas, so I didn’t ask for details). Both of them later asked me what they should do with the money.
After all appropriate disclosures and disclaimers, I told them that if they didn’t have anything productive to do with the money to pay it back. In sum, they had no idea of how they could best invest their money to make it earn more than what they were being charged in interest. I also told them that they should keep some money in reserve, especially in this economy. Many personal finance experts are regularly recommending a reserve of six to nine months of monthly expenses.
I explained to them that the sooner they paid back the money, instead of hording it in the bank, the less interest they would pay over all. I don’t have regular contact with the majority of people whom I brokered home equity loans, so I find it telling that I might hear this from some of my ex-clients. It made me wonder how many others took out home equity loans for a project that was never completed.
