The use of home equity loans to consolidate debt has nearly doubled in the past five years, according to a new industry survey.
The nationwide survey conducted by the University of Michigan's Survey Research Center at Ann Arbor, Mich., showed that 68% of the homeowners with home equity loans used the funds to consolidate or repay outstanding debt.
The figure is up sharply from 1988, when only 34% of borrowers drew out money for debt servicing.
The funds were most often used to make home improvements or pay back debt originally used for property improvement. But that number actually dropped slightly to 44% this year, down from 49% in 1988.
Home equity loans, typically closed-end lump-sum loans with monthly fixed payments, skyrocketed in popularity in the past few years, both among banks and consumers.
Revolvers Also Popular
Revolving lines of credit that tap into the equity of a borrower's home have also been increasingly accessed by consumers. These "home equity lines of credit" provide a pool of cash that can be taken out in varying amounts whenever needed.
Most money drawn from home equity lines of credit, 39%, was used to pay back debt, with credit cards being the most common type debt of considered.
The survey found that 13% of all mortgage holders also had second mortgages or home equity lines of credit, up from 11% in 1988. The increase equals about 1.7 million households.
Some of the other findings from the survey include:
* The average amount outstanding for second mortgages was about $11,000, down $4,000 from 1988.
* The average amount outstanding for lines of credit was $15,000, up $5,000 from 1988.
* Older and higher4ncome home owners were more likely to have second mortgages or equity lines of credit.
Northeast homeowners were more likely to have either type of equity products, but major gains were made by consumers in the Western and North Central states in both types.
Banks Compete Strongly Popular among consumers because of their tax-deferred status, home equity loans have also been the focus of intense competition among banks vying for a slice of the pie, estimated to be more than $271 billion of loans outstanding.
Since the end of the refinancing boom, home equity loans have been in the spotlight as an alternative source of revenue in an otherwise lackluster year of low originations and almost nonexistent refinancing.
The 1994 survey, sponsored by American Financial Services Association and the Consumer Bankers Association, was conducted from November 1993 to March 1994 - traditionally a period of high activity because of tax season. The center's original survey was conducted between July and December 1988.