Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, March 18, 1990 TAG: 9003212471
SECTION: HOMES PAGE: D4 EDITION: METRO
SOURCE: DAVID W. MYERS LOS ANGELES TIMES
DATELINE: LENGTH: Medium
It's true that taking out a home-equity loan can let you unleash thousands of dollars in built-up equity to spend any way you wish.
It's also true that the loans can save some homeowners hundreds or even thousands of dollars in taxes. As a general rule, you can borrow up to $100,000 based on your equity and still write off all your interest payments.
Since deductions for non-mortgage debt are being phased out, you can save a lot of money by taking out a home-equity loan and using the proceeds to pay off your other debt, such as auto loans and credit card bills. Since the new loan will be linked to your mortgage, you'll still be able to write off most or all of your finance charges.
But despite these benefits, financial planners say home-equity loans aren't for everyone. They worry that borrowers who lack spending discipline will get in over their heads, and that too many people don't realize that they may lose their homes through foreclosure if they can't pay the money back.
They advise, only take out a home-equity loan to meet more important needs. Those include paying tuition, starting your own business, meeting major medical bills or remodeling your house.
If you can justify tapping your equity, you'll have two basic borrowing choices: a conventional second mortgage or a home-equity credit line. Each type has its advantages and drawbacks.
A conventional second mortgage is the easiest to understand. You get the money in one lump sum and usually pay it back at a fixed interest rate in fixed monthly installments. The typical repayment term is 15 years.
A home-equity credit line - sometimes called a home-equity account, or simply an HECL - is the most heavily promoted type of home-equity loan. It's basically a revolving line of credit, much like a Visa or Sears card: You get a pre-established line of credit based on your equity and access the money with special checks or a credit card.
Most credit lines have adjustable rates, so monthly payments vary. It's important to remember, though, that the credit lines are just "second mortgages in drag": The lender can foreclose if you can't pay the money back.
Deciding which type of loan is best for you depends on a variety of factors.
If you don't like the uncertainty of adjustable-rate loans, you'll probably want to stick with a conventional second mortgage.
If you're thinking of taking out a home-equity loan, it's a good idea to consult an accountant or financial planner to see what they think of your plans. They might also do a better job of explaining the tax ramifications than your loan officer will.
Also, don't overlook the benefits of simply refinancing your current home loan. It might be the cheapest and easiest way to tap your equity.
Finally, do lots of comparison shopping among financial institutions if you decide that a home-equity loan makes good sense. "Lenders are in a fierce marketing war right now, and some are offering really good deals," said financial planner Reiff.
If you're thinking of taking out a credit line, here are some important questions to ask each potential lender:
What kind of interest-rate "caps" are on the loan?
The caps limit how high the interest rate on the loan can go at each adjustment period and how high it can go over the life of the loan.
Which index is used to make periodic rate adjustments?
Two of the most common indexes used by lenders are the prime rate index and the Treasury bill index. If changes are linked to the Treasury index, you'll need to know which Treasury index - there are the one-month, three-month and one-year Treasury indexes, just to name a few.
How big is the lender's margin?
The margin covers the lender's costs and provides it with a profit. If the index rate is 9 percent and the margin is 2 points, the interest rate on the loan will be 11 percent.
What kinds of up-front costs are involved?
Some lenders charge hundreds or even thousands of dollars for points and other items, while others charge only nominal set-up fees.
Are there monthly or annual fees?
Some lenders charge stiff fees just to keep the credit lines open, even if you haven't borrowed a penny.
by CNB