Use of home equity lines of credit — a type of revolving loan that had a troubled reputation for its role in the 2008 financial crisis — is increasing after hitting post-crisis lows two years ago. (Getty) (andresr via Getty Images)
Cash-strapped Americans are turning to their homes to pay off debt and deal with the rising cost of living.
Use of home equity lines of credit — a type of revolving loan that had a troubled reputation for its role in the 2008 financial crisis — is increasing after hitting post-crisis lows two years ago.
For quite some time, these products have been a popular means of financing home renovation projects, but lately mortgage lenders say that many of the applications that pass through their hands are for debt consolidation.
“It’s a lot easier,” said Rochelle Adamson, a freelance hairstylist, virtual assistant and content creator who consolidated more than $55,000 in debt on seven credit cards with a HELOC she took out on a rental property last year.
“You take it a little more seriously since you can’t just take this card and go to the store,” he explained. “It is linked to your bank account. You have to log in. Your house depends on it.”
The resurgence of HELOCs (home equity lines of credit) comes at a counterintuitive time for many homeowners’ finances because, After several years of high inflation, many are more in debt than ever.
However, they are also at near-record levels of home equity: $315,000 on average, according to CoreLogic data.
In total, at the end of June, homes added about $35 trillion in equity for families, according to Federal Reserve data.
However, as home values increased, so did those homeowners’ consumer debt.
More in debt than ever
Nationwide credit card debt surpassed $1.14 trillion at the end of June, 5.8% more than the previous yearaccording to data from the New York FED.
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Auto loan debt has also been growing, reaching a total of $1.63 trillion.
“People are really struggling,” said Sarah Rose, senior mortgage fairness manager at Affinity Federal Credit Union.
“The amounts they have to pay for credit cards, personal loans or interest rates are simply astronomical. Consolidating that debt with lower interest rates over 30 years is a triumph for many people.”
The argument for using a HELOC to consolidate debt is relatively simple. HELOCs can have fixed or variable interest rates, generally a prime rate plus an additional amount known as the spread is applied.
Much more attractive rates
The link to prime rates makes them one of the few types of loans where interest rates adjust almost immediately after the Federal Reserve changes its benchmark rates.
Rates vary depending on several factors, such as the customer’s creditworthiness, but have recently hovered around 9%, according to Bankrate.
Although it is a higher figure than the typical rates that apply to the first mortgage, it may be interesting for those who have debt on their credit cards.
Just think that in May, average card interest rates exceeded 21%.
Nationwide credit card debt topped $1.14 trillion at the end of June, up 5.8% from a year earlier, according to New York Fed data. (Getty) (Liubomyr Vorona via Getty Images)
Like credit cards, HELOCs are a form of revolving credit, meaning customers can, but are not required to, take advantage of the full approved amount and re-access the funds after paying them off.
Customers typically have a fixed period during which they can withdraw their HELOC, typically 5 to 10 years, and in some cases they will only pay interest on the balance during that time period. When the withdrawal period closes, they have a set payment term of up to 20 years.
For Adamson, who lives in Honolulu, Hawaii, with her husband and daughter, the math added up. Before taking out the HELOC, she felt that her monthly credit card payments, which totaled up to $3,200, were not reducing her overall debt.
Their card interest rates ranged from 18 to 22 percent, while their HELOC ranged from 10 to 11.5 percent.
“Interest can really be crucial in determining how much you can pay and how quickly,” he said.
Last year, he paid off about $20,000 of his HELOC debt and, after pausing more aggressive payments to rebuild a depleted emergency fund and make some additional withdrawals to cover other expenses, She is now paying an average of $1,000 a month to cover her balance.
The risk is high: housing
However, there are also several reasons to be cautious before opting for a HELOC to pay off other debts. Ultimately, HELOCs are home-secured, meaning that, In the worst case, a lender could seize your property if you default.
In some cases, customers may also receive a larger line of credit than they need to consolidate their debt, so it’s important for them to keep their overall spending in check.
Gerika Espinosa, a financial planner at DMBA in Salt Lake City, Utah, recommends using HELOCs as a debt consolidation tool only when you are confident that you are able to live within your means and won’t be tempted to use more money than you can afford. line of credit you need.
“HELOCs are like fire,” Espinosa said. “They can help a person progress if they know how to contain themselves and manage it properly. But they can also get out of control and become an obstacle to your personal financial situation.”
Although the use of HELOCs is growing, their presence is minimal compared to the financial crisis. Lenders provided more than $700 billion in credit lines in early 2009, but now their books only reflect about $379 billion.
Cash-strapped Americans are turning to their homes to pay off debt and deal with the rising cost of living. (Getty) (SB Arts Media via Getty Images)
Many banks exited the market or limited themselves to sporadically offering lines of credit when interest rates were low.
Achieve, a non-bank lender, began offering fixed-rate HELOCs for debt consolidation in 2019, a time when home values were rising and few banks were active in the sector.
Kyle Enright, the company’s president of lending, said more conservative loan terms have acted as a guarantee for its customers to use the lines responsibly.
“None of our debtors have lost their homes,” Enright confirmed. “Very few HELOC borrowers in the last five or six years have actually lost their homes. As long as the lender employs reasonable underwriting standards, the consumer is not at much risk.”
Claire Boston
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