Your recent story regarding the serious consequences facing overextended home-equity borrowers (Business, July 19) echoes a disturbing trend that does not appear to be correcting itself. Homeowners cannot continue to sign away their homes to bank marketers without understanding the consequences of doing so. If they’re not careful, homeowners will lose their most valuable asset–their home–in a fraction of the time it took them to save for it.
To ill-informed consumers, the logic of such borrowing makes sense: “Pay for a new car or college tuition or pay off your credit-card balances by borrowing against the value of your home, and deduct all of the interest paid on your tax return.” But can they afford the payments necessary to fully repay the loan? Probably not. As a result, they resort to making interest-only payments each month, never fully repaying the principal and recouping the value of their home represented by a second mortgage.
According to a recent study, of the 4.2 million households that used home-equity loans to pay off some or all of their credit-card debt during the past two years, more than 2.7 million had accumulated new credit-card debt when the survey was completed last month. In fact the survey found that 4 million American households have shifted $26 billion in credit-card debt to home-equity loans. Homeowners like the ones in your article are a reflection of the more than 40 percent of borrowers who use a home-equity loan this way.
One of the challenges homeowners face is understanding the barrage of home-equity offers directed at them. In print and on the radio and television, lenders tout the compelling features of such loans–lower interest rates, tax savings and debt consolidation. During football and baseball season, they use professional athletes to “throw” their offers at homeowners. Although the marketing is well-planned, the education that should accompany the marketing is virtually non-existent.
Consumers and lenders alike must approach the business of home-equity loans more responsibly. Borrowers should educate themselves first. Then they should analyze their ability to repay such loans, carefully protecting the investment made in their home and, thereby, ensuring their future financial well-being.
For their part, lenders must take a more active role in educating consumers about responsible borrowing and examine their own lending practices. In doing so, they’ll surely be compelled to stop lending up to 100 percent or more of a home’s value, stop encouraging consumers to borrow beyond their ability to repay and stop approving marginal credit risk just to capture a point or two of market share.
Unless we work to reverse this trend while our economy is strong, a downturn will surely spell disaster for lenders and borrowers alike.
