Home equity spent with a credit card

Some lenders let owners spend home equity using a credit card

The mortgage industry is a creative one; whenever a new trend pops up in the market, they are there with new products to help exploit it. As housing prices have gone through the roof in recent years, long time homeowners who are equity-rich are eager to borrow against it. They don’t necessarily need the money; it just seems like a waste to have hundreds of thousands of dollars worth of equity sitting around doing nothing. So they do something with it - they spend it.

Traditionally, home equity can be used in several ways. The most common is the home equity loan, where a “second mortgage” is taken out on the property and the lender gives the homeowner a check for the amount borrowed. The homeowner pays it back over a fixed amount of time on a set payment schedule. That wasn’t creative enough, so the mortgage industry came up with the home equity line of credit. It works like a checking account - you are approved for a set amount and you write checks to spend the money as needed. You then pay it back a little at a time, as though it were a credit card bill. The interest rate is adjustable, and you can take as little or as long as you like to repay the money.

Even that wasn’t creative enough, so the lenders have come up with this new twist for the home equity line of credit - the credit card. Instead of writing checks, you can now spend your home’s value using a Visa or Mastercard. You can use it anywhere those cards are accepted, and spend it on whatever you like - milk at Wal-Mart, books at Amazon, or new shoes at Bloomingdale’s. For purposes of spending, it’s just like any other card...or is it?

With normal credit card use, you accumulate unsecured debt. That debt has no collateral to back it up. If you default, you can be sued for failing to pay, but the lender can’t come to you and take something from you as compensation. That’s not the case with home equity-based credit cards. Those cards, and the loans they represent, are secured by the value of your property. If you fail to pay, you could lose your house to foreclosure. 

Not only that, but unless you repay that money back each month as you spend it, those debts that you run up with these cards will accrue interest. Granted, it’s less interest than you wold normally pay on a credit card loan, but it is interest just the same. And consumers tend not to repay home equity lines of credit particularly quickly. That pizza that you have delivered is one that you could be paying for over the next five or ten years, with interest. Do you really want that?