The people affected by Hurricane Katrina will see first hand the downside of taking equity out of their homes in the coming year. Where many might have been able to break even had they left their equity alone, a good number will now be facing foreclosure at the very least and possibly bankruptcy. While mortgage companies have been lenient due to the circumstances, there will be a time when the loans will have to be paid back. They may be letting survivors defer payments for the time being and even waiving late fees and not reporting delinquent accounts to the credit bureaus, but this is a short-term program that won’t last forever. (you can read more about this at money.com)
This is the danger of taking equity out of your home — which many people seem to be doing without a second thought these days. If something unexpected happens, there is a good chance you’ll lose it all. It doesn’t even have to be a major disaster like Katrina. Simply losing your job could land you in the same position (since the lenders probably won’t be lenient as they have been with the Katrina victims).
When it comes to consolidating debt, using your home equity should be a last resort – and then only when you have pinpointed and resolved the reasons that you got you in debt in the first place. Katrina has taught a lot of hard lessons to many of the people living in the area that was hit by her, and for many it will teach even more hard lessons on how the personal financial decisions they made in the past will come back to haunt them.