Ramsey says this question elicited the most honest answers. "From people I talk to every day on the radio, the percentages here are a more accurate portrayal of behavior than the other answers. The responses in the earlier questions represent how people believe they should behave but from the people we talk to -- it isn't how they are behaving," he says.
In which cases is borrowing on home equity a smart money move?
Source: Bankrate.com 2007
Function of economics and life stageWhen the responses are broken down by demographic information, another story emerges. As is healthy, attitudes toward home equity usage shift with income levels.
As Flint-Budde points out, the lowest income households don't think it's a good idea to tap home equity, judging it "never a smart move," (at 63 percent), though 69 percent recognize it as a more cost effective way of borrowing.
"Perhaps the lowest income households feel the least secure about finances," she suggests. Because they have fewer assets, they are more nervous about leveraging their homes. But with little in savings and tight finances, Flint-Budde says, lower income homeowners may have to turn to their home equity to meet expenses.
Home equity attitude depends on individual circumstances, says Greg McBride, Bankrate's senior financial analyst. "For a high income household, home equity borrowing can be attractive. They may have a 5.5 percent after-tax cost. This group tends to have more diversified assets and are not in a situation where they're 'betting the farm' like the low income groups. For those with lower incomes, where the house is their only asset, they need to have the hands-off mentality and focus on saving and building wealth in other areas."
He says there may also be a correlation between overall financial literacy and income.
Economics is often partially a function of life stage. The following box shows a quick breakdown of different group home equity behavior, as indicated by the poll results.
- 50 years or older are the least likely to tap home equity. Reflects generational attitude: Pay off your home before retirement and never touch the equity.
- Midcareer respondents are the most likely to use home equity as part of an overall strategy of debt management, using it to consolidate and finance education. This group is stretched with family obligations.
- 20-somethings may never have seen a real estate market go down so they are willing to tap home equity for short-term needs.
"My overall reaction is that this data is much more positive than what has been reported in the popular press," says DeMong. "These respondents are looking at the home equity loan as a secondary source of funding rather than the first source and are using it in a financially responsible manner (only 4 percent said they would use it for a vacation)."
Susan Keating, president of the National Foundation for Credit Counseling (NFCC), was also heartened by respondents' conservative view in terms of how they would like to use home equity loans and lines, but says the results show there is still work to be done in terms of financial education and financial literacy.
This national random-digit-dialed phone study of 1,004 adults 18 or older was conducted for Bankrate by GfK Roper Public Affairs & Media. The surveys were conducted from May 4 through May 6, 2007. The sample was weighted by demographic factors including age, gender, race, education and census region to ensure reliable and accurate representation of adults in U.S. households. Results based on the sample of 765 adult homeowners are projectable to the entire adult population in the United States, with a sampling error of plus or minus 4.3 percentage points.