Be prudent in tapping home equity
|||Chart: Home equity on the rise|
By Glen Creno
It's a ready trove of cash and it's right there in the family room, the bedrooms, the garage. So why not spend it?
That's the attitude many consumers are taking about the equity in their homes. More of them are tapping a resource that once seemed untouchable to pay off credit cards, buy cars or fly off to Las Vegas.
Properly used, home-equity loans or credit lines are a handy tool in a financial crunch. But experts say too many acquisitive consumers are taking big financial risks borrowing against their homes just so they can keep spending.
The numbers bear out the trend. Total U.S. home-equity debt outstanding rose from $277 billion in 1992 to $753 billion last year, according to SMR Research in Hackettstown, N.J. That included a stunning 25 percent leap last year.
Individual loan amounts have jumped, too. The Consumer Bankers Association says equity-loan balances averaged $24,100 in 1997 and hit $34,000 last year. The average balance on credit lines increased to $31,000 last year, though the banking group noted most consumers use just 60 percent of the line.
"The money's too easy. It's been an era of extremely easy money," said Dan Ray, editor of Bankrate.com, a financial site based in North Palm Beach, Fla.
The loans look like a painless way out, but marketplace whims can load a negligent borrower with sudden and intolerable debt. The loss of a job, a medical emergency, a spike in interest rates or a tailspin in home values all of it can turn that easy home-equity payment into a fearsome obligation.
The ultimate cost: loss of a house.
"These loans might work in an up economy where you have a job, you're getting raises, house values are going up, increasing your equity. But if any of the legs on that stool crumble, there goes your house," Ray said.
Part of what's driving the popularity of equity loans is consumers' desire to consolidate credit-card debt at lower rates. Home-equity rates run higher than first mortgages but some are tied to marketplace rates that are heading lower now as the Federal Reserve continues cutting.
Aggressive lenders are pushing the business, too, enticing consumers with loans that offer more than a house's value and bombarding television and mailboxes with easy-out consolidation pitches.
Jay Butler, director of Arizona State University's Real Estate Center, says he gets at least one consolidation pitch a day by phone and jokes that "if it wasn't for the home equity offers, the mailman would never stop."
Butler sees a fundamental shift in the way homeowners view their houses. In the past, the goal was to retire the mortgage as quickly as possible and live payment-free. Thrifty homeowners who lived through the Depression or a world war tapped their home's equity only for emergencies.
"People viewed the equity in their home as sort of sacrosanct," Butler said. "They had a mortgage, paid it down, then burned it."
Now, the house is just another asset to be leveraged to best advantage, Butler said.
The shift comes from a heightened sophistication or at least more aggressive management of money on the part of homeowners.
And because of frequent job shifts, divorce and more singles owning homes, these owners are much less likely to stay in one place for their entire lives.
"People learned the home is part of their investment portfolio, and they just live in it," Butler said.
But these sophisticated investors can outsmart themselves, especially those looking for home equity to rescue them from the frantic juggling of credit card balances. Kim McGrigg, spokeswoman for Consumer Credit Counseling Services Southwest, said too often people who've wiped out credit card debt look at those empty balances and start spending again.
"You are simply moving your debt," she said. "You're not changing your lifestyle. You cannot borrow your way out of financial trouble. It's looked at as a quick fix and it absolutely is not."
Bankers defend their home-equity lending practices. Fritz Elmendorf, of the Virginia-based Consumer Bankers Association, notes that the loan marketplace is extremely competitive and institutions are jostling hard for customers who want easy and convenient loan applications, quick approvals and rate competition.
"The issue is: Are some consumers getting in over their heads?" he said. "It really comes down to consumers being able to responsibly handle the credit. The industry's own interests are in line with the consumers and keeping people from becoming overextended. There's no advantage to getting people into too much debt."