Cash-strapped Americans are using their homes to pay down debt and keep up with the rising cost of living.
Use of home equity lines of credit — a type of revolving loan that developed a troubled reputation for its role in the 2008 financial crisis — is on the rise after hitting post-crisis lows two years ago. The products have long been a popular means of financing home renovation projects, but lately, mortgage lenders say many of the applications that cross their desks are for debt consolidation.
“It’s so much easier,” said Rochelle Adamson, a self-employed hairdresser, virtual assistant, and content creator who consolidated more than $55,000 of debt across seven credit cards with a HELOC she took out on a rental property last year.
“You’re taking it a little more seriously because it’s not like you can just pull this card out and go to the store,” she added. “It’s attached to your bank account. You have to log in. It’s attached to your home.”
The resurgence in HELOCs comes at a contradictory time for many homeowners’ finances: After several years of high inflation, many are more indebted than ever. But they’re also sitting on near-record levels of home equity: $315,000 on average, according to data provider CoreLogic.
Read more: What is a HELOC, and how does a home equity line of credit work?
All told, households had about $35 trillion of equity in their residences at the end of June, Federal Reserve data show.
But as consumers’ home values were rising, so too was their consumer debt. Credit card debt nationwide topped $1.14 trillion at the end of June, up 5.8% from a year earlier, according to New York Fed data. Auto loan debt has also been on the rise, totaling $1.63 trillion.
“People are really struggling,” said Sarah Rose, senior home equity manager at Affinity Federal Credit Union. “Credit cards, personal loans — the rates on those are just astronomical. Consolidating that debt into a lower rate over 30 years is a winner for a lot of people.”
The case for using a HELOC to consolidate debt is relatively straightforward. HELOCs can carry fixed or floating rates, typically the prime rate plus an additional amount known as spread. The link to prime makes them one of the few types of loans where interest rates adjust almost immediately after the Fed changes benchmark rates.
Rates vary depending on factors including a customer’s creditworthiness, but lately have averaged around 9%, according to Bankrate. While that’s higher than typical first mortgage rates, the math can be appealing for those who carry a balance on their credit cards. As of May, average card interest rates were over 21%.
Read more: HELOC vs. home equity loan: Which is better when rates are high?
Like credit cards, HELOCs are a form of revolving credit, meaning customers can, but don’t have to, tap the entire amount they’re approved for and can re-access the funds after paying them down.
Customers typically have a set period during which they can draw on their HELOC — usually 5 to 10 years — and, in some cases, only pay interest on the balance during that time. After the draw period closes, customers have a set repayment period of up to 20 years.
For Adamson, who lives in Honolulu, Hawaii, with her husband and daughter, the math made sense. Before she took out the HELOC, she felt like her monthly credit card payments of as much as $3,200 weren’t making a dent in her overall debt load. Her cards’ interest rates were between 18% and 22%, while her HELOC has ranged from 10% to 11.5%.
“Interest can really play a big part in how much you can pay off, and how quickly,” she said.
She paid off around $20,000 of debt on the HELOC last year, and after pausing more aggressive paydowns to help rebuild a depleted emergency fund and making additional draws to cover other expenses, she’s now paying about $1,000 a month toward her balance.
There are reasons to be cautious about using a HELOC to pay down other debt. Ultimately, HELOCs are secured by one’s home, meaning in a worst-case scenario, a lender could seize the property if a borrower goes delinquent.
And in some cases, customers might be approved for a larger credit line than they need to consolidate their debt, making it important to keep overall spending under control.
Gerika Espinosa, a financial planner at DMBA in Salt Lake City, Utah, says she recommends using HELOCs as a tool for debt consolidation only when she’s confident a client is capable of living within their means and won’t be tempted to use more of the credit line than they need.
“HELOCs are like fire,” Espinosa said. “They can help one progress well if contained and managed well. They can also get out of control and be a detriment to one’s financial situation.”
While HELOC use is growing, it’s still a fraction of what it was during the financial crisis. Lenders extended more than $700 billion of the credit lines in early 2009, but now have around $379 billion on their books. Many banks exited the market or only sporadically offered the credit lines when interest rates were low.
Achieve, a non-bank lender, began offering fixed-rate HELOCs aimed at debt consolidation in 2019, a time when home values were rising but few banks were active in the space. Kyle Enright, the company’s president of lending, said more conservative lending terms have helped ensure customers can use the lines responsibly.
“None of our borrowers have lost their home,” Enright said. “Very, very few of any borrowers who have taken out HELOCs in the last five to six years have lost their home. As long as the lender is employing reasonable underwriting standards, there is not a lot of risk to the consumer.”
Claire Boston is a senior reporter for Yahoo Finance covering housing, mortgages, and home insurance.
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