When is it OK to tap home equity?
NEW YORK – Sept. 21, 2018 – As a result of rising home values, many homeowners find that they're sitting on a record amount of home equity that they could access by refinancing or taking out a second mortgage. However, people have been shy about tapping into that wealth, in part because the home prices decreases during the recession that left many owners underwater.
However, a new survey from Bankrate.com of 1,000 consumers shows that homeowners have plenty of legitimate reasons to take out a loan to unlock it.
Consumers' "growing penchant toward debt might make it tempting to tap into their home's value," says Greg McBride, Bankrate's chief financial analyst.
Nearly three quarters of homeowners recently surveyed say that home improvements or repairs are an acceptable reason to access the equity they have in their homes. In fact, more than half of those surveyed say that is the best reason to apply for a cash-out refinance loan or home equity line of credit (HELOC).
Survey respondents cited other reasons they'd be tempted to use their home equity, including to consolidate debt (44 percent);
- Pay for tuition or other educational expenses (31 percent)
- Keep up with regular household bills (15 percent)
- Make other investments (12 percent)
- Big purchases (9 percent believe it would be a good idea to use home equity to purchase big-ticket items, such as appliances and furniture)
People with lower incomes were more likely than higher earners to say it's OK to tap into home equity to meet ordinary expenses, the survey found; and millennials seem more willing to tap into home equity than older generations: 22 percent of millennial respondents say that borrowing from home equity to pay day-to-day bills is a viable option, compared with 12 percent of members of older generations.
Even homeowners with doubts about tapping in their home equity may be tempted to do so. Many households are overstretched financially, which could heighten the temptation to borrow. According to a recent Federal Reserve report, 44 percent of Americans say they could not cover a $400 emergency expense out of pocket.
"With the sorry state of emergency savings and increasing levels of consumer debt in a rising interest-rate environment, it's a matter of 'when' not 'if' more homeowners turn to home equity to fund home improvements and repairs, or consolidate debt," McBride noted in the survey's report.
Using equity to pay for home improvements that increase the value of your home can help rebuild any of the equity taken out, McBride says. The new tax law that went into effect this year also allows homeowners to deduct the interest they pay on home equity loans and HELOCs if the proceeds are used to finance improvements that add significant home value.
Still, financial experts recommend caution for homeowners thinking about borrowing against their home equity, especially because using a home as collateral means they could lose it if they're unable to repay the lender.
"For a disciplined homeowner, using home equity to consolidate debt at a lower interest rate can be a savvy way to cut interest costs and accelerate debt repayment," McBride says. "But for undisciplined homeowners, it ties up an asset that is put at further risk of foreclosure while the temptation to run up high-cost debt all over again proves difficult to resist."
Source: "Renovations Best Reason to Tap Home Equity, Homeowners Say," Bankrate.com (Sept. 19, 2018)
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