Americans took a $ 362 billion risk with their home
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For many Americans, their home is their most precious possession. Homeownership can help build wealth, both as the value of your home increases and as you pay off your loan and gain equity in your property.
Sadly, millions of Americans have taken a great risk that could jeopardize their homes. Collectively, homeowners across the country have bet $ 362 billion. And many don’t even realize the risk they took.
Here’s how so many Americans put their homes in jeopardy
So what’s the big – and risky – bet the Americans have placed? They bet that they will be able to pay off the home equity lines of credit. Home equity lines of credit, (or HELOCs) are a type of revolving loan secured by the value of your home.
When you buy a HELOC, you are using your home as collateral to access a line of credit. The line of credit works in the same way as a credit card, in that you can borrow up to a certain limit, pay off the money over time, and borrow over and over again, as long as you don’t go over your credit limit. The big difference, however, is that your HELOC is secured by your home while credit cards are Insecure debt.
According to recent research from The Ascent, Americans have collectively borrowed $ 362 billion in revolving home equity debt as of the third quarter of 2020. And each individual borrower with a HELOC typically owes a substantial amount, with the average home equity line of credit valued at $ 49,929 in 2019.
These balances are important because home equity lines of credit are popular among homeowners. They can offer flexibility, since you can access the line of credit when needed. And they tend to have a lower interest rate than many other types of debt.
But unfortunately, every time a homeowner takes a HELOC, they are betting that they will be able to make payments. If they can’t, they risk foreclosure. After all, since the house secures the loan, it is relatively easy for the lender to repossess the house in the event of a default. On the other hand, a credit card or Personal loan the issuer could sue for non-payment, but won’t be able to foreclose and resell your home if you don’t make the bills.
There is another huge risk to think about too
Tapping into a home’s equity isn’t just dangerous because of the risk of foreclosure, however. It can also increase the risk of not being able to sell your home to cover what you owe.
Suppose, for example, you have a house worth $ 300,000 with a value of $ 220,000 mortgage on it and you use a HELOC to borrow an additional $ 49,000. You would be in good shape if you had to sell – if you could find a buyer to pay market value. Selling the house for $ 300,000 should give you enough to pay off your collective mortgage debt of $ 269,000 as well as closing costs and a 6% commission to real estate agents.
But if the property values fell even a little to, say, $ 275,000, you’d be in trouble because you probably couldn’t pay off your mortgage and all the costs associated with selling the house.
And if they went down even more and the price of your house was less than the combined value of your loans, you would be in really bad shape. You would be stuck in your house unless you could bring tens of thousands of dollars of your own money to the table at the close. And that could be a big deal if you have to sell due to job loss or some other financial disaster.
Think carefully before putting your home in danger
In certain circumstances, it makes sense to borrow against the equity in your home, for example to essential home improvements it will help to keep or increase the value.
But you have to be aware of the risk you are taking. You may need to sell in a bear market or face future payment issues. Sadly, millions of Americans who have collectively bet $ 362 billion may not fully understand the potential dangers associated with their choice. Don’t let this happen to you.