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

Though the majority of the people surveyed said they would handle a financial crisis by tapping their savings, nearly half can't. Some (18 percent) would turn to home equity borrowing; an equal number to credit cards and 13 percent don't know what they would do. The plight of this last group becomes more interesting in light of our next question.

Borrow from home equity or charge it?

Getting back to the home equity vs. credit card debate, we asked which of these two forms they consider to be "a more cost-effective way of borrowing." Overwhelmingly (73.5 percent), people judge home equity to be the smarter economic choice, while 13.5 percent say credit cards are better and another 13 percent say they don't know which is wiser.

Flint-Budde points out what she sees as a discrepancy: "It doesn't make sense that the same percentage of people would use a credit card to finance an unexpected expense as would use a home equity loan, going back to the first question, while 73 percent see the home equity as the more cost-effective way of borrowing money."

Which is generally a more cost-effective way of borrowing?

Source: Bankrate.com 2007

One explanation, proffered by DeMong, is that their responses may indicate a reluctance to use home equity loans. "They may be aware that the penalties for defaulting on a credit card are far less than defaulting on a home equity loan, which could cause them to lose their home."

How do you treat your home equity?
When asked a behavioral question, how they treat their home equity, the largest group (but not the majority at 41 percent) of respondents call it their "Holy Grail." The next largest groups at less than half that (17 percent) use home equity as an emergency savings account. Interestingly, DeMong points out, the savings account response just about matches the 18 percent who say they would fund an immediate need with a home equity loan in the first question.

How do you treat your home equity?

Source: Bankrate.com 2007

Only 7 percent of respondents say they tapped their home's equity to pay off other debts. Yet, when asked, "Is borrowing from your home's equity a smart financial move," 29 percent think it's a good idea, which it is, says DeMong, provided they don't run up new credit card balances.

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He also points out that while 41 percent claim they treat their home equity as a Holy Grail, a majority of the respondents said they would use this Holy Grail for home remodeling, debt consolidation, college education expenses, automobile purchase and a family vacation.

Home equity borrowing is never a smart move, in the opinion of 37 percent of respondents, a rate very close to the number who think home remodeling is a smart use.

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Time to sound HELOC alarm bells?

Dear Dr. Don, I have a variable-rate home equity line of credit, or HELOC, at 2.9 percent. I'd like to convert it to a fixed-rate mortgage. I have 20 years remaining to pay off the home equity line. Would it be beneficial... Read more

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