In response to ever-increasing financial pressures, families have come to depend on high-cost credit as a way to bridge the gap between stagnant or decreasing incomes and rising costs. How are families coping with their new burden? To hang on to the American Dream, to be part of the ownership society, homeowners are depleting their home equity to pay off a growing mountain of unsecured debt—a financial strategy fraught with serious consequences.
As mortgage interest rates fell to record levels during the refinance boom, it became more appealing to cash out home equity during the refinancing process to pay down credit card debt and finance current living expenses—a short-term solution that fails to address the long-term economic realities faced by the average family.
As the housing bubble deflates and interest rates on risky adjustable-rate mortgages have risen, more and more homeowners are feeling the pinch. Refinancing for a second or third time is becoming a common Band-Aid. Defaults are also increasing, particularly for subprime mortgages. The added burden of missing a mortgage payment results in putting at risk your home—your family’s most important asset. All of these factors lead to a crisis in personal finance: a blurred line between good debt—debt that results in appreciable assets—and bad debt, which does not.
