Home Equity Loan Delinquencies Increase With Credit Card Debt

[Jul 17, 2009.]

 

According to recent data from the American Bankers Association, delinquencies on home equity loans and credit card debt reached record highs in the first quarter of 2009. As home prices temporarily skyrocketed in the past, many homeowners treated their homes more like an ATM machine--refinancing every so often to consolidate debts into a new mortgage. As a result, home equity loans, a common debt consolidation loan, became one of the major culprits of the current market crisis we face today.

Based on the report released by the American Banker's Association, home equity delinquencies climbed to 3.52% in early 2009 compared to 3.03% in late 2008.  Most notably, late payments on these loans jumped to a record level of 1.89%. At the same time, credit card debt delinquencies spiked to 6.6%, compared to 5.52% in late 2008. Analysts have begun to speculate that more and more borrowers will be living off their double digit interest rate credit cards as home equity loans have become harder to obtain. Additionally, some speculate that credit card debts could further increase as the effects of taxpayer's refund checks begin to wear off.

Dangers of Treating Your Home Like An ATM
--Home Prices Could Fall. As most homeowners have experienced firsthand, it becomes more difficult to deal with additional mortgages as home prices depreciate. Not only is it tougher to refinance an existing mortgage, it also becomes harder to move or sell the home outright. And while most home equity loans can typically cover the average consumer's credit card debts, it can also quickly eat into one's available home equity. Those having the toughest times are homeowners who've consolidated multiple times through the equity in their home. When home prices began to head south, many lost the safety net of their home's equity they often relied on to eliminate credit card debt.

--Mortgages Can Be More Brutal Than Credit Card Debts. While delinquent credit card accounts can take quite a hit on your credit score, missed payments on a home equity loan can lead to much more serious troubles. As noted in the report by the ABA, home equity loan delinquencies continues to be one of the leading causes of foreclosures. As a result, borrowers need to strongly consider the potential consequences when consolidating credit card debts through a mortgage. The option can save considerable amounts on interest finance charges--but if homeowners aren't careful, the move could also quickly jeopardize the roof over their heads.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.