Home Equity Loans

As interest rates fall and homeowners become dependent on home equity loans and lines of credit economists become concerned that the economy will suffer. This fear comes from the belief that as homeowners take advantage of the equity in their homes by applying for low interest home equity loans or lines of credit, they become more financially burdened and therefore likely to curb their normal spending. Although they may lower their monthly payments by taking advantage of these home equity loans, they may be less likely to spend this additional monthly because of their debts. This means that home equity loans can indirectly have a detrimental effect on the economy.

Although common sense seems to dictate that if consumers have more money on a monthly basis to spend, the economy will thrive many economists are seeing a reverse effect. As consumers open a home equity line of credit to take advantage of low interest rates they find that they have more money available to them on a monthly basis. This increased cash flow stems from lower interest rates. However, many consumers are hesitant to spend this cash because they feel overburdened by their debt. This debt includes the home equity line of credit that makes the additional cash available. When this happens economists see a decline in the growth of the economy.

Property values are rising at rapid rate but wages are not keeping up with this growth. As a result new homeowners are faced with the daunting task of trying to purchase their first home. First time homeowners are finding themselves in considerably more debt than their parents. This debt is due largely to increasing housing prices. These high prices cause new homeowners to go into debt to acquire their first home and current homeowners to seek out ways to consolidate their debts under a home equity loan or line of credit. This increasing debt makes consumers more reluctant to spend money on other things such as vacations, presents at holidays and even food. With this reduction in spending comes a slowing down of the economy.

When a homeowner opens a home equity line of credit they are typically able to borrow as much as 10 percent of the value of their property. This figure alone is staggering and can result in the homeowner getting themselves into a serious amount of debt. Those who are in significant debt typically curtail their spending habits. While placing limitations on spending may be a very prudent decision for the now indebted homeowner it can negatively affect us all. Their frugality results in less money in circulation for everyone else. Placing less money in circulation can have a snowball effect that can have far reaching ramifications. For example just cutting out a daily latte may mean that the coffee vendor has to cut costs by possibly purchasing less inventory. When this happens the delivery people may have to find a way to save money and this could include laying off warehouse personnel. This ripple effect can continue all the way down to those who pick the coffee beans for a living. They may find that there is less need for their services.