December 3rd, 2008 12:52 PM

Good investment decisions rule
People are wising up, and they're steering clear of four bad borrowing choices.

1. Buying bigger. When home values were booming, people didn't think twice about tapping their home equity to buy a bigger house or a nicer car.  Now, homeowners are approaching their financial choices on a pay-as-you-go basis.  Everyone now understands that home values aren't guaranteed to rise forever.  If you tap into too much home equity to pay for the finer things in life, you could wind up trapped in your home, as you try to pay off a loan that's worth more than your house.

2. Using home equity for investments. There's a school of thought that if you borrow money at 8 percent, and put it in an investment that returns 10 percent, you'll come out ahead.  That's a best-case scenario.  In a worst-case scenario, the value of your home will decrease, along with your stock market portfolio, and you'll have nothing to show for it except excessive debt.  Guess which scenario has struck people after the housing market collapse and the stock market nosedive?

3. Tapping equity for a tax deduction. Ask any accountant and he'll tell you:  Don't spend your money to get a tax deduction.  If it fits within the overall structure of your tax planning, a deduction is great.  But spending a dollar to get 25 or 30 cents off your taxes makes no sense at all.  Consider the deductibility of mortgage interest to be a nice perk, not a means to generate wealth.

4. Refinance to defer debt. A typical move by cash-strapped consumers is to use home equity for debt consolidation.  This type of refinance works only if you change your spending habits after you've paid off those credit cards.  If you continue to spend outrageously, those cards will get maxed out again, and you'll have even less home equity for another debt consolidation loan.  Change your spending habits instead.

For the last 20 or 30 years, the nation has over-indulged in easy credit and an irrational housing market.  Reality has set in, and we all need to adjust to the new lending standards.  One by one, people in this country will begin to make smarter borrowing choices.  With a tightening lending market, they really have no other choice.

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