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Cash-strapped Americans leveraging their homes to pay bills
AS US household debt rises and wages stagnate, millions of Americans are tapping home equity to keep up with day-to-day expenses.
Twenty-four million homeowners believe borrowing against home equity is 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 whom were homeowners - from Sept 7-9.
Almost one in three homeowners who earn less than US$30,000 per year said it's permissible to tap home equity to cover their daily bills, more than triple those who make US$75,000 or more. 21 per cent of those with no more than a high school diploma agreed, nearly doubling those who have a college degree. And 22 per cent of millennials also felt home equity was an appropriate resource for paying bills, compared with only 12 per cent of older Americans.
"These people are living pay cheque to pay cheque with little or no emergency savings, and they're scraping up money any way that they can," said John 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 one in four Americans have no such savings, according to a June Bankrate.com study. But even cash-strapped homeowners are more fortunate than many, he said, since US homeownership has fallen to the lowest rate in more than 50 years.
About three in four homeowners said home improvements or repairs are an appropriate reason to borrow from home equity. Other reasons included 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 a Federal Reserve Bank of New York report released in August. Total household debt rose 3.5 per cent from a year earlier in the April-to-June period, to a record US$13.3 trillion, while mortgage debt also rose 3.5 per cent to US$9 trillion.
The cost of home equity borrowing is on the upswing as well. Interest rates on home equity lines of credit are at their highest since the 2008 financial crisis, data from Bankrate.com shows. This increase is in line with US benchmark interest-rate hikes.
"The high interest rate on home equity debt is going to aggravate the situation," Mr Bryant warned.
"And it could ultimately dampen property sales." WP