Process Improvement Column: Survey Finds Consumers Don’t Fully Understand The Advantages Of Home Equity

FirstClose, Inc., a fintech provider of data and workflow solutions for mortgage and home equity lenders nationwide, released the findings of a new national consumer survey that explored homeowners’ level of awareness of home equity and how it could be used to pay down higher interest credit card debt.

In March, FirstClose commissioned a third-party online survey of 1,000 homeowners who have lived in their homes for at least two years and who have at least two credit cards with outstanding balances.

The survey asked consumers a series of questions about their knowledge of home equity loans (HEL) and home equity lines of credit (HELOC) and on their willingness to use these products for different applications, such as consolidating debt, home improvement and to pay for major life events.

The findings suggest that there is significant lack of awareness among consumers regarding the financial advantages of leveraging home equity debt versus other kinds of consumer debt.

Some of the key findings include:

Lack of awareness of interest rates

• Nearly half of the respondents (44%) did not know what the interest rate was on their credit cards. (The average credit card rate was 27.9% as of April 2024, according to Forbes Advisor.)
• The majority of respondents (77%) did not know what the average interest rate is on a HELOC. (The average HELOC rate was 9% as of April 2024, according to Bankrate.)
• 30% of respondents had between $2,500-$10,000 worth of credit card debt. (According to Experian, the average credit card balance was approximately $6,500 at the end of last year.)

Willingness to tap into home equity

• 40% of respondents believe they have more than $200,000 worth of equity in their homes and within that, 27% believe they have more than $250,000 worth of equity.
• When asked if they would access their home’s equity to pay off debt, the responses were almost evenly split with 49% responding yes and 51% responding no.
• More than half of respondents (56%) said they would access the equity in their homes for a home renovation project.
• Only 34% of respondents said they would access their equity to finance a big purchase, such as a car, a trip, tuition etc.

Misconceptions about home equity products

• Nearly 40% did not know the difference between a closed-end home equity loan and a HELOC.
• 37% of respondents mistakenly believed that if they took out a HELOC, they would be giving up their historically low first mortgage interest rate. Considering that 35% of respondents have a first mortgage interest rate of less than 3.5%, this might be one of the reasons why they’re reluctant to tap into their home’s equity.

“The findings of this survey underscore the critical gap in consumers’ understanding of the financial benefits of leveraging their equity,” said Tedd Smith, CEO of FirstClose. “U.S. homeowners currently have more than $28 trillion in tappable home equity that could be used to pay down credit card debt, which now has topped $1.14 trillion. If a consumer with an average balance of $6,500 made only the minimum payment it would take 13 years and cost roughly $11,800 to pay off the debt completely.”

Smith continued, “Lenders are uniquely positioned right now, while rates are still on the high end, with no sign of coming down anytime soon, to educate homeowners on the advantages of utilizing home equity responsibly. By empowering homeowners with accurate information and providing comprehensive guidance and resources, lenders can help their customers make informed financial decisions.”