Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, September 25, 1995                   TAG: 9509260005
SECTION: MONEY                    PAGE: 6   EDITION: METRO  
SOURCE: MAG POFF STAFF WRITER
DATELINE:                                 LENGTH: Medium

TO FUND MAJOR EXPENSE, PUT YOUR HOME ON THE LINE

People in that position often turn to the biggest investment they own - the equity tied up in their house - through a home equity line.

This is one of the few sources of money that provide a tax deduction for the interest costs. And home equity lines usually carry lower interest than other lines of credit.

But homeowners must be aware of the one major pitfall: The house is on the line should you have to default on repaying the loan.

Shop carefully for a home equity line so you find the bank program that is right for you. If you plan to keep a loan outstanding, it doesn't matter if the bank charges a fee for low usage. But the fee is an unnecessary expense if you intend to save the line of credit for emergencies such as a serious illness.

You must choose a plan with care, because closing costs on a new line might equal $250 to $500 unless the bank picks up those fees. That's often the case when banks are promoting loans.

Home equity lines are really second mortgages on the house, but with the revolving-credit aspect of a credit card.

Traditional second mortgages generally come with a fixed interest rate and repayment through equal installments for a specific number of years. They suit people who want a specific amount of money up front, perhaps for home improvements, plus the security of a certain payment schedule.

Home equity lines, on the other hand, fit people who need money from time to time, perhaps for college tuition payments. They can repay as much as they are able as long as they meet a monthly minimum.

The interest rate on a home equity line floats, usually with the prime rate. Signet Bank, however, uses the floating London Interbank Offered Rate or Libor. This rate may be slightly lower than prime, but it is not widely published.

The equity line, like a second mortgage, is based on the money you have invested in the house.

Assume you bought a $100,000 home some years ago with an $80,000 mortgage. While you paid down the mortgage to $65,000, the value of the house rose to $110,000.

That means you have equity of $45,000, the difference between the first-mortgage balance and the present market value of the property.

If you qualify in terms of your credit history, a bank will give you an equity line of revolving credit in return for a second mortgage on the house. The amount you can borrow is typically 80 percent of the equity, or $36,000 in the example.

Equity lines are flexible because you can borrow, up to the limit, as you need funds and as you pay off prior loans. You can just write a check for what you need without going back to the bank.

You will pay interest only on the amount you borrow, not on the line itself, although some banks charge an annual fee. And you can deduct the interest up to certain high limits, even if you use the money for a non-house purpose such as buying a car.

On the down side, a large line of credit invites disaster unless it is handled with care.

You can choose how much to repay every month without penalty, but anyone paying the low minimum would make little headway against the debt. Some banks offer an option of paying only the interest, so that the loan would never be paid off until the house is sold. At the time of sale, all mortgages are due.

And the interest rate floats, so the monthly payment can rise if the market is rising.

Prime today is 8.75 percent, so the average equity line loan carries an interest rate of 10.25 percent. Most banks offer caps on the rate they charge, but the caps are as high as 24 percent. Remember that prime peaked at 21.5 percent in 1980.

With the house - which might be saved in a bankruptcy - directly at risk with an equity line, the money should not be used for living expenses, vacations and the like.

But they open up an otherwise frozen asset as a source of money for such major expenses as college tuition, serious illness and home improvements.