Be Careful With That Home Equity Line of Credit

A new report by the American Bankers Association says that the number of borrowers who have fallen more than 30 days behind on their home equity lines of credit is now at the highest level in 11 years.

Here’s more proof that we didn’t need that the economy today is a rough one. With the prices of everything from food to gasoline skyrocketing, it’s getting more difficult for homeowners to pay their bills.

A home equity line of credit is a valuable tool. Operating much like credit cards, these products, often referred to as HELOCs, are open-ended loans that borrowers pay as revolving debt. Unlike credit cards, though, HELOCs use homeowners’ residences as collateral. As with home-equity loans, the amount of money homeowners can borrow depends on the amount of equity they’ve built up in their homes.

Homeowners use these loans to finance trips, pay for renovations or pay off other debts. Borrowers, though, do need to exercise some caution. Several studies have shown that borrowers who have already run up their credit cards to high levels are likely to do the same with their HELOCs. This is bad news considering that many borrowers take out HELOCs with the intent of using the funds from them to pay off their credit cards. If these borrowers then run up equally high monthly payments on their HELOCs, they haven’t improved their financial situation.

The American Bankers Association study shows that borrowers have to be just as careful with their HELOCs as they are with their credit cards. U.S. residents have a distressing propensity to ring up high levels of credit-card debt. Doing the same with HELOCs can cost you your home.