US Households Now Pay as Much Interest on Other Debt as on Mortgages

In a significant shift, U.S. households are now paying as much interest on non-mortgage debt—including credit cards, student loans, and other forms of borrowing—as they do on their mortgages. Let’s delve into this trend and explore how it contrasts with the use of Home Equity Lines of Credit (HELOCs) and Home Equity Loans.

The Balancing Act: Non-Mortgage Debt vs. Mortgages

According to the Bureau of Economic Analysis, non-mortgage interest payments reached an annual rate of $573.4 billion in January, the highest on record even after adjusting for inflation. This amount is within a hair’s breadth of the $578.3 billion in annual mortgage interest payments households were making as of the last quarter of 2023. This near parity between the two series is unprecedented in data going back to the 1970s. Historically, mortgage interest payments were about twice as large as other types of interest payments.

The balance has shifted due to millions of Americans locking in cheap home loans during the post-2008 decade and even lower rates early in the pandemic. These low-rate mortgages shielded homeowners when the Federal Reserve began raising borrowing costs. However, other types of credit—such as credit cards and personal loans—were not similarly protected. As a result, the cost of servicing these debts has ballooned since 2022.

?Home Equity Lines of Credit (HELOCs):

• HELOCs allow homeowners to borrow against the equity in their homes.
• Flexible: Borrowers can access funds as needed, like a credit card.
• Variable Interest Rates: Interest rates can fluctuate based on market conditions.
• Risk: If property values decline, borrowers may owe more than their home is worth.
• Use Cases: Home improvements, education expenses, or emergency funding!

?Home Equity Loans:

• Home equity loans provide a lump sum of money upfront.
• Fixed Interest Rates: Borrowers know their interest rate from the start.
• Predictable Payments: Monthly payments remain consistent.
• Risk: Like HELOCs, the risk lies in property value fluctuations.
• Use Cases: Major expenses like home renovations or debt consolidation.

Contrast and Considerations:

HELOCs offer flexibility but require discipline to manage ongoing borrowing. Home equity loans provide predictability but lack the flexibility of HELOCs. Both options allow homeowners to tap into their home equity, but borrowers must weigh their financial goals and risk tolerance. Interest rates play a crucial role. While mortgage rates remain historically low, credit card rates have surged to record levels (above 20%). The growing burden of consumer debt raises concerns about potential defaults.

As Americans navigate this landscape, understanding the trade-offs between mortgage interest, non-mortgage debt, and home equity options becomes essential. Whether it’s managing existing debt or leveraging home equity, informed decisions can lead to better financial outcomes. Loan Officers should be addressing these options with consumers. Financial choices are personal, and what works best depends on individual circumstances. Speaking to a Loan Officer will help determine what is best for most circumstances.