Home Equity Line of Credit - A Financial Boon for Bank and a Debt Trap for Consumers

Home Equity Loans, where a borrower uses the equity of their home as a collateral to borrow money at a fixed interest rate.

According to a NY Times article, since the early 1980s, the value of home equity loans outstanding has ballooned to more than $1 trillion from $1 billion, and nearly a quarter of Americans with first mortgages have them. That explosive growth has been a boon for banks. Banks’ returns on fixed-rate home equity loans and lines of credit, which are the most popular, are 25 percent to 50 percent higher than returns on consumer loans over all, with much of that premium coming from relatively high fees.

However, what has been a highly lucrative business for banks has become a disaster for many borrowers, who are falling behind on their payments at near record levels and could lose their homes.

The article also cites how clever advertisement campaigns by various banks and financial institutions touting the benefits (i.e. remodeling the house by borrowing against your home, paying for college, etc) of the home equity loan have lured consumers into borrowing on their homes and spending way beyond their means.