Why Aren’t Americans Tapping Into Home Equity?

Americans are sitting on over $6 trillion in home equity, according to Black Knight, and for those who do tap into their equity, they tend to put it right back into their homes. A survey from Bankrate.com found that three-quarters of homeowners say that making home improvements or repairs is a good reason to withdraw cash from their home equity. Other uses of equity include consolidating debt (44 percent); paying for tuition or other educational expenses (31 percent); keeping up with regular household bills (15 percent); and making other investments (12 percent).

Less homeowners are willing to use home equity loans or home equity lines of credit, however, Bankrate CFA Greg McBride states that increasing debt among homeowners may mean more Americans will tap into their home equity.

“With the sorry state of emergency savings and increasing levels of consumer debt in a rising interest rate environment,” McBride says, “it’s a matter of ‘when’ not ‘if’ more homeowners turn to home equity to fund home improvements and repairs, or consolidate debt.”

Bankrate found an income divide in home equity usage, as lower-income households — those earning less than $30,000 a year — were almost twice as likely to view home equity as a viable way to keep up with their household bills as those earning $50,000 to $74,999. Additionally, according to the Federal Reserve, 44 percent of Americans couldn’t cover a $400 emergency expense out of pocket.

“That nearly 1 in 6 Americans view ‘keeping up with regular household bills’ as an appropriate reason to borrow from home equity speaks to how far some households are stretched on a monthly basis,” McBride says.

McBride notes that in order for these homeowners to tap into their equity, they need to be smart.

“For a disciplined homeowner, using home equity to consolidate debt at a lower interest rate can be a savvy way to cut interest costs and accelerate debt repayment,” McBride says. “But for undisciplined homeowners, it ties up an asset that is put at further risk of foreclosure while the temptation to run up high-cost debt all over again proves difficult to resist.”