ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, November 11, 1996 TAG: 9611120141
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
IF you own your own home, you probably occupy the biggest source of cash that's available to you.
That is the financial equity in your house - the difference between the value of the house and the mortgage you're already paying. You can tap that worth through a home equity line at a bank.
Home equity lines, because they are backed by the value of the house, usually carry the lowest interest rate you can find for borrowing money. Virtually all lines are tied to the prime rate, the charge that banks and other lenders levy on their most creditworthy customers. Currently the prime stands at 8.25 percent. Most homeowners can borrow at one or 11/2 points above prime, meaning a going rate of 9.25 to 9.75 percent.
(Signet Bank, which declined to list rates in the adjacent chart, last year used the floating London Interbank Offered Rate or Libor instead of prime rate. This rate is usually comparable to prime, but its fluctuations are less publicized.)
On top of that, the government will help you borrow with a tax deduction on that interest, up to very high limits so long as the house is the loan's collateral. This is true even if you use the money to buy something totally unrelated to the house, such as a new car.
But borrowers need to be aware of one major problem. If you borrow against the equity in your home, your house will be directly on the line if you default on repaying the loan.
You should shop among banks and thrifts for the line that is right for you. If you carry a balance, you don't have to worry about a fee for non-usage. That fee, however, is an unnecessary expense if you intend to save the line as a source of funds for an emergency, such as an illness.
Most of the banks, but not all of them, are currently paying the closing costs. This expense can run from $250 to $500 or more, depending on the value of the house and other factors.
Home equity lines are really second mortgages on the house, but with the revolving-credit aspect of a credit card.
If you want an exact amount of money up front for a specific purpose, such as remodeling the house, and you like the discipline of steady and predicable payments, you should consider a traditional second mortgage instead.
Home equity lines, by contrast, suit people who want money from time to time, such as for college tuition payments, and who have the self-discipline to pay off the periodic loans. You can repay as much as you are able as long as you meet a minimum payment.
The amount you can borrow depends on the value that you have built up in your house.
For example, assume you bought a $100,000 home some years ago with an $80,000 mortgage. While you paid down the mortgage to $70,000, the market value of the house rose to $110,000.
That means you have equity of $40,000. That's the appraised value of $110,000 less the mortgage of $70,000.
If you have only recently moved into your first home, you have probably built up little, if any, equity unless your house is rising rapidly in value.
But you probably can't borrow your value up to the hilt. Most banks will allow you to borrow 80 percent of the equity or, in this example, $32,000. Some banks will permit you to borrow up to 100 percent of the equity, but at a higher rate of interest.
If you qualify for a line in terms of your credit history, the money you borrow against the equity line becomes a second mortgage against the house.
Equity lines are flexible because you can borrow, up to your limit, as you need money and as you pay off prior loans. You can just write a check for what you need without going back to the bank for approval of each loan.
You will pay interest only on the amount you borrow, not on the entire line available to you. Some banks will let you use a credit card, but most access the account only through checks. Other banks charge an annual fee for the card or for the line.
Home equity lines also have some downsides.
Anyone making the minimum payment 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 the house is sold, all mortgages must be paid off in full.
And the interest rate floats, so the monthly payment can rise if the prime rate should go up. Some banks cap their rates - at very high levels - but others have no cap. The prime rate is low today, but remember that it peaked at 21.5 percent in 1980. If that should ever happen again, you would be paying annual interest of 23 percent.
Finally, your house, which might be saved in a bankruptcy, would be directly on the line.
You do not use the value in your house for living expenses, clothes, vacations and the like.
But home equity lines do allow you to tap an otherwise frozen assets for such important expenses as college tuition, serious illness and home improvements.
LENGTH: Medium: 92 lines ILLUSTRATION: GRAPHIC: Chart: Home equity lines in the Roanoke Valley. color. KEYWORDS: MGRby CNB