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Cash-strapped Americans are willing to leverage their homes to pay the bills

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.

world Updated: Sep 19, 2018 21:17 IST
Bloomberg
Bloomberg
US household,Expenses in US,leverage
US flags are seen near the Mall in front of the US Capitol in Washington, DC on July 3.(AFP File Photo)

As US household debtrisesand wages stagnate, millions of Americansare thinking about tapping into home equity to keep up with day-to-dayexpenses.

Twenty-four million homeowners believe borrowing against home equityis an acceptable way to cover regular bills, according to a Bankrate.com report released on Wednesday. Cash-strapped millennials, low earners and the less educated were most likely to think home equity offered an appropriate solution to ordinary bills.

“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.”

The study, conducted by research firm GfK, surveyed a national sample of 1,000 American adults—719 of whomwere homeowners—from Sept.7-9.

Almost 1in 3homeowners who earn less than $30,000 per year saidit’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 22percent of millennials also felt home equity was an appropriate resource for paying bills, compared withonly 12 percentof older Americans.

“These people are living paycheck to paycheck with little or no emergency savings—and they’re scrapingup 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.

Almost 1in 4Americans have no suchsavings, according to a June Bankrate.com study. But even cash-strappedhomeowners are more fortunate than many, Bryantsaid, sinceUS homeownership has fallen to the lowest rate in more than 50 years.

About 3 in 4homeowners said home improvements orrepairsare an appropriate reason to borrow from home equity. Other reasonsincluded debt consolidation and education expenses, the study found.

US household debt has continued to rise through the second quarter, propelled by an increase in mortgage borrowing, according to aFederal Reserve Bank of New York report releasedin August. Total household debt rose 3.5 percent from a year earlier in the April-to-June period, to a record $13.3 trillion, while mortgage debt also rose 3.5 percent, to a whopping $9 trillion.

The cost of home equity borrowing is on the upswing as well. Interest rates on home equity lines of credit, otherwise known as HELOCs, are at their highest since the 2008 financial crisis, data from Bankrate.com show. This increase is in line with US benchmark interest-rate hikes.

“The high interest rate on home equity debt is going to exasperate the situation,” Bryant warned. “And it could ultimately dampen property sales.”

First Published: Sep 19, 2018 20:02 IST