Millions of homeowners may be redirecting home equity into other investments

Tapping home equity through a line of credit can make sense for many reasons, but following a report that HELOC balances are increasing, new research reveals some risky uses by some borrowers.

While leveraging HELOCs while maintaining locked-in low mortgage rates rather than opting for costlier cash-out refinances makes sense, especially to fund home improvements and repairs, many homeowners are using this borrowing to fund short-term experiences or put the cash into other investments.

Bankrate.com research shows that most Millennials (46%), Gen Xers (61%), and Boomers (58%) are using HELOCs to improve their homes or for debt consolidation (around one third of respondents across all generations, led by Gen X).

But 30% of Millennials are using HELOCs for investments other than their homes, far above the share of Gen Xers (13%) or Boomers (8%) that are doing that, and they are also more likely to be using these lines of credit to keep up with regular household bills (23% vs. 13% and 12% for the other two generations), along with those with household incomes below $50K.

Other uses of HELOCs that respondents believe are good uses of the borrowing include: paying tuition or other education expenses (16%), taking a vacation (7%), and buying big-ticket items such as electronics or a boat (6%).

Perhaps most concerning is that 18% said there was “no good reason” why they had used a HELOC and 9% didn’t know what a good reason would be.

“A small but significant share of homeowners said they’re willing to tap into their home equity for questionable purposes,” said Bankrate Analyst Jeff Ostrowski. “While Bankrate endorses using home equity for home renovations and repairs, we advise against tapping equity for short-term outlays such as shopping sprees or vacations. You don’t want to be paying off that one-week cruise for the next 15 years.”  

HELOC rates are currently around 9%.