I don’t know a whole lot about it, but the article above makes it seem pretty simple.
In answer to your question about when people will actually pay back these loans, I agree with your “what the hell?” assessment of the situation. I wonder the same thing.
Rising home equity gives you the opportunity to do a few things:
1) Cash out and move to an area where prices are NOT inflated (as much).
2) Cash out, stay in town, but downsize.
3) Borrow more money!
Lots of people have taken option 3. I think a very common thread was people with credit card debt using a HELOC to pay that off, and buy a BMW while you’re at it. After all, it’s “free money” and your house will only ever go up in value so you can always sell in a pinch if you need to. Besides, the payment is only XXX a month! What a deal!
I don’t think the majority of HELOCers realized that they were only paying interest, that the interest would double in 2 years time (which it has already), and that they would actually have to pay this money back at some point!
Plus, once the HELOC is maxed out, I believe the spenders will go back to their old lifestyle of gradually accumulating credit card debt because their spending habits have not been fixed. If anything, they’re probably worse now because the infusion of cash has made them feel more wealthy than they really are (the wealth effect!) and so their lifestyle has changed. Nicer vacations, nicer restaurants, kids have a higher allowance, etc. It’s REALLY hard to go down in lifestyle, but it only take a nanosecond to go up!
