Monday, May 26, 2008

Pulling Out Equity

The chart accompanying this article about the auto industry, showing how many new cars were purchased using HELOC funds, is pretty staggering especially since auto dealers have long had generous financing deals which probably would've provided lower interest rates than the relatively low HELOC rates.

It supports an idea I've been mulling over for awhile, that when people got HELOCs they didn't really quite conceptually understand that they were just taking out a loan. They thought they were selling a little bit of their home to the bank. I don't mean that they literally didn't know it was a loan they had to pay back, but I think the concept of "pulling out equity" gave people a sense that they were actually taking a bit of the profit on their imagined home price increase, instead of just taking out a loan against it.