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Buying a home: Still beneficial or will it empty your pockets?
Are there benefits to owning a home or does it require a future of being strapped for cash? According to a recent study by the Experian National Score Index, there are several advantages to homeownership. Consumers with mortgages seem to manage their debt more efficiently than those without mortgages. On average, consumers with mortgages had higher credit scores and more access to credit. The study also revealed that Americans are taking out equity in their home in order to obtain additional money – an added benefit to owning a home.
Kudos to consumers with mortgages
According to the study, average credit scores for consumers with a mortgage* were over 40 points higher than those without a mortgage, 700 versus 658. Consumers with multiple mortgages – defined as having two or more mortgages on their credit file – had a 721 credit score, the highest in the group. The study also found that mortgage-toting consumers tend to have more open credit accounts. On average, they had 7 open credit accounts compared to just 2 for those without a mortgage.
Home Sweet Home Equity
In recent years, consumers have become more interested in taking out home equity loans or home equity lines of credit. According to the study, from 2001 to 2006 the percentage of consumers with open home equity loans or lines of credit increased by 63%. Some of the things they may be doing with the money include paying off debt, paying for unexpected expenses, investing in second homes or funding home improvements. However, taking on more debt can be financially dangerous, and consumers should do their research before jumping in.
Below are three common categories of how consumers may be spending their home equity money. Which category best describes you?
"Scramblers"
Consumers with mounting debt may need the extra cash from their home equity to pay outstanding bills, such as credit card debt, utilities, and other loans. Additionally, they may need the extra money to pay for unexpected expenses, such as increased fuel costs or medical expenses. The Experian National Score Index study showed that consumers with a mortgage tend to seek more credit, with 67% more average credit inquiries than consumers with out mortgages. Additionally, credit utilization – the percentage of one's overall credit limit used, or utilized – also increased. For example, consumers with a mortgage utilized almost 32% of their available credit, while those without a mortgage utilized less than 19%.
"Investors"
Some consumers may use their home equity for investment purposes, including purchasing second homes and/or vacation homes. Although nobody knows what the future holds, it's important to calculate how much you can afford to borrow and not get overextended. Tying up your money in investments means that the funds are not available for other uses, such as paying off bills. It's important to avoid making late payments, which can have a negative impact on your credit score. According to the Experian National Score Index study, consumers with a mortgage had 13% more late payments on average than those without a mortgage.
"Home Improvers"
Consumers who use their home equity money to fund home improvements know how costly this can be. Whether it's because of home improvements or increased expenses overall, the study showed that consumers with a mortgage have 4 times more average debt than consumers without a mortgage. Further, consumers with multiple mortgages on their credit file saw their average debt increase almost 6 times. Debt includes revolving debt, such as credit cards and department store charges, plus installment debt, such as auto loans or student loans.
Is it time for a "time out?"
While buying a home still offers some benefits, more Americans are increasing their debt load by taking equity out of their homes. Before making a move, consumers should research all of their options and be sure to do their homework. Whether they are Scramblers, Investors or Home Improvers, now is a good time for them to step back and assess their financial situation. By understanding how their credit behavior impacts their credit scores and their ability to manage their debt, they can empower themselves to make well-educated financial decisions.
*Consumers with 1 mortgage account on their credit report
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