Financial Literacy 2007 - Home equity
A cartoon man in purple pulling a large piece of money out of an orange and red house with a yellow background
home equity
Homeowners upside down in homes

Of Americans polled in a recent Bankrate survey, 4 percent say they owe more than their homes are worth. If that number is accurate, it means 3 million of the nation's 75 million homeowners are "upside down" in their home loans in a time of declining home prices, putting these homeowners in a severe financial vise.

“I'm encouraged that only 4 percent have mortgage debt greater than the value of their home, but 4 percent is still a significant number.”
-- professor Richard DeMong
Upside down in a home means you can't borrow from your home equity in case of emergencies because there isn't any equity to borrow against. You can't even sell your home unless you can come up with a check to cover the shortfall. People land upside down on their houses in a few ways: the house loses value, the loan balance rises or both.

Bankrate commissioned GfkRoper to survey the nation's homeowners to reveal how they regard and use their home's equity as part of our yearlong Financial Literacy series. While we are encouraged that the overall results show most homeowners seem to understand the value of home equity, the 4 percent who admitted to owing more on their home than it is worth is significant. And, another 4 percent weren't sure if they were upside down or not.  

How would you pay for an unexpected expense of several thousand dollars that you needed to pay immediately?

Source: 2007
"I was generally encouraged by the findings that only 4 percent have mortgage debt greater than the value of their home," says home equity researcher and University of Virginia professor Richard DeMong. "However, 4 percent is still a significant number. I wonder whether this is a function of declining home prices or whether it's a function of taking out a first and second mortgage loan that exceeded the value of their home."

Unfortunately, home prices are expected to fall 0.7 percent in 2007, recent projections from the National Association of Realtors indicate, making this the first time since the Great Depression that the nation's median home prices have fallen.

Equity is an asset

Despite some homeowners' lack of equity, on the whole the respondents seem to understand the value of home equity and say they are reluctant to draw on it.

When asked how they would pay for "an unexpected expense of several thousand dollars," slightly more than half respond that they would pay for it with savings, a result that seems to fly in the face of statistics and shocks our people in the know.

Bankrate talked to a couple of experts who spend their days talking to people on different ends of the financial spectrum: Nancy Flint-Budde, a Certified Financial Planner, and Dave Ramsey, host of a financial call-in radio show and best-selling author. Both agree these results may be the result of wishful thinking.


"Statistically, 70 percent of Americans are living paycheck to paycheck and have no savings," says Ramsey, author of "The Total Money Makeover." "How they answer on a survey and what really happens are two very different things."

Flint-Budde agrees. adding that perhaps "the respondents said what they felt the interviewer wanted to hear."

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