Using Home Equity to Tackle Debt: A Growing Trend

In recent years, an intriguing trend has been emerging among American homeowners: leveraging home equity to manage debt. Today, we're going to explore what’s driving this trend, the tools that facilitate it, and some real-world applications and precautions.

The Rise of HELOCs

Home Equity Lines of Credit (HELOCs) are making a strong comeback. After reaching post-crisis lows two years ago, HELOCs are increasingly being used not just for home renovations but for debt consolidation. For many, this makes financial sense, especially in an era marked by high inflation and rising consumer debt.

A closer look reveals why HELOCs have regained popularity. According to CoreLogic, the average American homeowner has about $315,000 in home equity. This untapped wealth has opened new avenues for managing high-interest debts, like credit card balances. In fact, total household equity reached around $35 trillion at the end of June, making these assets a viable option for many seeking financial relief.

Real-World Application

Consider Rochelle Adamson, a self-employed professional who managed to consolidate over $55,000 in credit card debt with a HELOC on her rental property. For her, switching to a HELOC was transformative.

“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 explained. With her HELOC attached to her bank account and her home, the approach demanded more responsibility but offered substantial benefits.

Why a HELOC Can Be a Smarter Choice

The appeal of HELOCs lies in their relatively lower interest rates compared to credit cards. Currently, HELOC rates hover around 9%, as per Bankrate, whereas the average credit card interest stands at over 21%.

Unlike traditional loans, HELOCs offer flexibility. Borrowers can draw funds up to their approved limit and repay as needed over a period of 5 to 10 years, followed by a repayment phase, which can extend up to 20 years. This makes HELOCs particularly appealing for those who want a revolving line of credit with fairly manageable interest rates.

The Fine Print

While the benefits are clear, caution is necessary. HELOCs are secured by your home, which means defaulting could result in losing your property. It's essential to borrow only what you need and stay disciplined. Financial planners like Gerika Espinosa often advise using HELOCs only when you can maintain control over your spending.

“HELOCs are like fire,” Espinosa noted. “They can help one progress well if contained and managed. They can also get out of control and be a detriment to one's financial situation.”

Who's Driving This Trend?

Non-bank lenders like Achieve have noticed this trend and cater to it by offering fixed-rate HELOCs specifically for debt consolidation. According to Achieve’s president of lending, Kyle Enright, conservative lending terms have mitigated risks, with none of their HELOC borrowers losing their homes in the past five to six years.

Conclusion

As American homeowners sit on substantial equity, leveraging this wealth through HELOCs offers a compelling solution to manage and consolidate high-interest debts. However, as with any financial decision, it’s vital to proceed with caution. Understand the terms, stay disciplined with borrowing, and ensure that a HELOC aligns with your broader financial goals.

By tapping into home equity wisely, homeowners can find themselves not just surviving but thriving, even in an environment of rising living costs and consumer debt.