Americans' propensity to use their home equity to pay for routine household expenses - as if it was a credit card - has waned in the years since the financial crisis, largely because home ownership rates have also plunged to the lowest level in modern US history.
But with borrowers sitting on massive amounts of untapped equity, one study by Bankrate.com suggests that millions of Americans are seriously considering tapping to pay for everyday purchases even as interest rates are pushing borrowing costs to their highest level since the financial crisis.
And as anybody who remembers the crisis would remember, this can become extremely problematic when it comes time to roll those loans over at a higher rate.
While HELOC borrowing declined again during Q2...
...Mortgage debt, which helped power the aggregate debt load for American households to a record-high $13.3 trillion, climbed for the eighth consecutive quarter.
As this mortgage debt gets paid down, homeowners will have even more leeway to borrow against their home equity. And according to the survey, 24 million Americans believe borrowing against their homes is an appropriate option for paying their monthly bills and other household expenses, even as most personal finance experts caution that this is absolutely not a good idea, per Bloomberg.
For most Americans, the reasons for this are self-evident: Stagnant wages, climbing prices and excessive debt burdens tied to student loans or other factors are squeezing American consumers forcing them to resort to ever more desperate measures.
"Regular household bills should be funded by a regular household income, not home equity," said Greg McBride, chief financial analyst at Bankrate.com. "Wage growth has been elusive, but rising household expenses have not. And now home equity is being seen as a lifeline for those who are strapped for money with little wiggle room."
What's worse, cash-strapped millennials, low-income workers and those without a college degree were more likely to view this option as appropriate.
Almost 1 in 3 homeowners who earn less than $30,000 per year said it’s OK to tap into home equity to cover their everyday bills, more than triple those who make $75,000 or more. Twenty-one percent of those with no more than a high school diploma agreed, nearly doubling those who have a college degree. And 22 percent of millennials also felt home equity was an appropriate resource for paying bills, compared with only 12 percent of older Americans.
Many of these would-be borrowers are already living paycheck-to-paycheck, which leaves little wiggle room to pay down loan balances when costs rise.
"These people are living paycheck to paycheck with little or no emergency savings—and they’re scraping up money any way that they can," said John Hope Bryant, chief executive officer and founder of Promise Homes Co., a property asset manager that offers affordable housing and financial support services to families.
And rise they will, as HELOC rates are already at their highest levels since the crisis, and expected to keep climbing as the Fed raises interest rates.
Fortunately, when traditional banks refuse to lend them another dollar to roll over their debt, maybe these borrowers can turn to Silicon Valley and take out a loan against future Airbnb revenues.