It Only Seems That Way

"Why would you ever want to take on more debt than your home is worth," ask Mike.


The short answer is that when you think liquidity is going to be a problem it is always better to have money in the bank and higher debt than no money in the bank and lower debt.

A longer answer is that people often think of taking out loans so that you can buy something you want. Ultimately, this is what most people do with borrowed money. However, you can also take out loans just to have more cash in the bank.

This is what I suggested that homeowners do. You never know when you will have an emergency, loose your job, etc. If you have credit available then you can whether those situations. If not, then you may be forced into dire straits such as foreclosure.

Therefore, if you think your credit is about to dry up, its always in your interest to pull out the money now. You can put it into a high yield savings account. If you never use it then you only owe the difference between the interest you are paying and the interest you are getting.

If you do use it then it could save you.

Now, thats the responsible take. Their is a less responsible corollary. That is, if you are planning to spend way beyond your means then you might as well borrow that money at 8% from your home equity line of credit, rather than 23% from your credit card.

In either case, it is better to borrow cheap easy money then be stuck borrowing expensive money or being short of money.

Of course, it would be better still to save responsibly and be lucky enough not to have an emergency. However, many people who have decided to live beyond their means are not going to stop until they are insolvent and almost by definition its difficult to control emergencies.

I don't know if that helps, but its important not to confuse borrowing with spending. Borrowing is a lot of money is imprudent. Spending a lot of money is imprudent.