Broke Americans willing to treat homes like ATMs to pay bills

As personal debt continues to climb, many flat-broke Americans believe maintaining everyday household bills is a good reason to tap into the value of their homes.

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Twenty-four million Americans think that withdrawing cash from their home equity is suitable for making home improvements, according to a new Bankrate.com survey.

Home equity is the property’s market value minus any outstanding loan balance, typically the mortgage. A home equity line of credit, often referred to as a HELOC, is a second mortgage that gives homeowners access to cash and uses their home’s equity as collateral.

“Home equity lines of credit are essentially a big credit card attached to your home,” Ramsay Solutions financial expert Chris Hogan explained to FOX Business’ Dagen McDowell on Wednesday.  “It’s a brilliant marketing plan by the banking industry because they never call it what it is — it’s a mortgage. It is a lien on your home.”

By taking out a HELOC, homeowners increase the risk of losing their home, he said, and devising a savings strategy is a much better way to pay for renovations.

“Home improvements are not a necessity; that’s a want. And what we can’t do is get our wants confused with our needs,” he said. “Leave your equity alone, save up, pay cash for improvements and other things you want to do.”

Most home equity loans come with variable interest rates, which means one’s monthly payment can go up or down over time. Studies have shown that a majority of Americans are living paycheck to paycheck, Hogan said, and he warned that rising payments could lead to another financial crisis.

“The American Dream is to buy a home and own it. The last thing you want to do is to treat your house like an ATM by pulling out equity,” he said. “And so people don’t need to tap into equity, they need to tap into a plan that will actually help them. They need financial help. This is a cry for help.”

Hogan added that the only good time to use equity is if you sell your home and use the cash to move forward.