DATE: Sunday, July 6, 1997                  TAG: 9707070211

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: BY TOM SHEAN, STAFF WRITER 

                                            LENGTH:  234 lines

BANKING ON HOME VALUE THE USE OF HOME EQUITY FOR LINES OF CREDIT IS ON THE UPSWING AS BANKS TOUT TEASER RATES AND MORE FLEXIBLE TERMS.

For homeowners, they offer attractive rates and flexible terms.

For banks, they produce interest income with limited risk.

After a lull during the early 1990s, home equity lines of credit are on an upswing.

In Hampton Roads, some banks have attracted borrowers by promoting below-market ``teaser'' rates. Others have done so by paying the borrower's closing costs.

At CENIT Bank in Norfolk, the use of a low introductory rate and aggressive promotion are paying off.

``Our pipeline of applications has been staying full,'' said Barry L. French, senior vice president and manager of CENIT's retail banking group.

But bankers and consumer advocates agree that variable interest rates and ease of use still make home equity lines dangerous for careless spenders. That's because borrowers risk losing their homes if they fail to repay.

``I've always felt that equity lines required a disciplined borrower,'' said William Hodsden, BB&T's retail banking manager for Hampton Roads.

Home equity lines of credit sprang to life in the mid-1980s, when Congress phased out the tax deduction for interest paid on consumer loans. By borrowing against one's house, an individual can still take a tax deduction on interest payments, even if a loan is used to buy a car or other consumer goods.

Unlike a second mortgage, a home equity line functions like a credit card: A borrower can choose when to use the credit and when to repay it. Someone who taps an equity line to buy a car can later use the line for college tuition or home improvements.

Because of the strong collateral of a home and the strong credit histories of most homeowners, banks tend to offer lower interest rates on home equity lines than on other consumer loans. This combination of lower rates and tax advantages has made equity lines appealing to a growing number of households in Hampton Roads.

``People are more educated about what's tax deductible and what isn't,'' said Frank Clements, senior vice president of the lending division at Life Savings Bank in Norfolk.

Nationwide, the amount borrowed through home equity lines doubled between 1987 and 1991. But their use stagnated during the early 1990s, partly because falling interest rates prompted some homeowners to refinance their first mortgages.

In 1995 and again last year, the pace picked up. By the end of 1996, debt on home equity loans stood at $140 billion, compared with $134 billion one year earlier, according to SMR Research Corp., a research and consulting firm.

Banks have been more than willing to provide home equity lines. By using variable interest rates, they can adjust their rates upward if the cost of funds increases. Home equity lines also enable smaller banks to make strong loans at a time of fierce competition for creditworthy borrowers, including auto buyers.

``It's very hard for most banks to compete with the automakers' finance subsidiaries like GMAC and Ford Motor Credit,'' said John M. Chattleton, executive vice president and chief retail officer at First Coastal Bank in Virginia Beach. ``When they want to sell cars, they drop the rates to levels we can't match.''

Until 1992, the largest single use of home equity lines was home improvements. Today, it's debt consolidation. In Hampton Roads, increasing numbers of borrowers use the lower rates and tax advantages of home equity lines to pay off large credit-card debts, bankers said.

Nationwide, debt consolidation accounted for 36 percent of the home-equity lines opened in 1995, according to a recent study for the the Consumer Bankers Association. That compared with a 27 percent share for home improvements and 9 percent share for education, according to the study.

So far, there's no indication that significantly more borrowers are losing their homes because of this debt-consolidation tactic. Last year, the foreclosure rate on home equity lines of credit edged up to 0.25 percent, from 0.13 percent in 1995, according to the Consumer Bankers Association study.

However, the increasing use of home-equity lines to pay off credit-card debt bothers some consumer advocates.

``There is a temptation to use home equity lines of credit because of their tax deductibility,'' said David Rubinstein, executive director of the Virginia Poverty Law Center in Richmond. ``But consumers should be very clear about their ability to repay these loans. The downside is that you can lose your house if you don't.''

Whatever plans they have for spending, people have to be cautious about putting a major asset like their home at risk.

``A home equity line is not for everybody,'' Clements of Life Savings cautioned.

Before prospective borrowers obligate themselves, they should know how much credit they are likely to need and how they will repay it. In addition, they should understand that a bank can cut short a credit line and demand immediate repayment under certain circumstances.

During the past decade, some borrower protections have been put in place. Although banks were once free to use their own internal indexes for setting interest rates, today they must use an external benchmark. In Hampton Roads, most banks use the prime lending rate, a widely used benchmark for rates on bank loans to businesses.

Today, the typical rate in Hampton Roads for an equity line is 9.5 percent to 10.5 percent, which is 1 to 1.5 percentage points above the prime lending rate. However, interest rates vary widely depending on the amount of the credit line, the credit line as a percentage of a home's value and the applicant's creditworthiness.

Borrowers with a hefty net worth or a strong relationship with a particular bank often can negotiate more favorable terms than those advertised. In some cases, borrowers are able to line up credit at or near the prime rate, which stands at 8.5 percent.

But there's a flip side to using a variable-rate loan: uncertainty about the future of interest rates and what one's payments might be in four or five years. For risk-averse borrowers, it may be better to use a home equity loan with a fixed rate and fixed repayment schedule.

When shopping for a home equity line, borrowers should weigh other factors, including the closing costs. To generate business, some banks are willing to pay these costs, which can amount to several hundred dollars if a home appraisal is needed.

Some lenders rely on a city assessment to determine the value of a home and will require an appraisal only if they are uncertain about the home's condition. Whether the bank offers to pay the closing costs, a borrower may be able to get a lower interest rate by paying the costs instead of passing them on.

Another matter to examine is the repayment terms. Some banks will allow a borrower to make interest-only payments for a certain period before requiring payments of principal.

To win over more customers for their home-equity lines, banks continue to add new twists. Some, including First Union National Bank, allow home-equity customers to tap their lines by using a credit card.

``It's probably going to happen with all banks'' because of the convenience that a credit card provides, said Hodsden of BB&T.

Elsewhere in the country, some equity-line lenders have been experimenting with rebates similar to the airline frequent-flier miles offered by credit-card issuers, said George R. Yacik, vice president of SMR Research in Hackettstown, N.J. ``It's getting very competitive,'' he said. ILLUSTRATION: ROBERT D. VOROS/The Virginian-Pilot

Graphics

WHAT TO ASK WHILE SHOPPING

VP

HOME LOANS

SOURCE: 1997 Home Equity Loan Study, Consumer Bankers Association

The Virginian-Pilot

BORROWING ON THE AMERICAN HOME

SOURCE: SMR Research Corp.

Graphic ROBERT D. VOROS, research and text by TOM SHEAN/The

Virginian-Pilot

SOME OF THE HOME EQUITY LINES OF CREDIT AVAILABLE IN HAMPTON ROADS

SOURCE: The financial institutions

[For complete graphics, please see microfilm]

HOW TO INTERPRET THE DETAILS

Annual percentage rate: At most banks, the interest rates for a

home equity line of credit are variable and are pegged to the prime

lending rate listed in the Wall Street Journal. The prime, which

also serves as a benchmark rate for many bank loans to businesses,

stands at 8.5 percent. One exception to this pattern is Signet Bank,

which uses the London interbank offered rate, or LIBOR, as the basis

for its interest rate on home equity lines of credit.

At some banks, the interest rate also is determined by the

loan-to-value ratio or the amount of credit provided to a borrower.

Maximum loan to value: This is the highest percentage of a home's

value that a bank will lend against. At most banks in Hampton Roads,

it is between 80 percent and 90 percent.

Interest rate cap: This the highest that the interest rate on a

home equity line can go.

Minimum amount available: This is the smallest amount of money

that a bank will make available in home equity line of credit.

Who pays closing costs: Because home equity lines are real estate

loans, they typically involve appraisal fees, attorney's fees and

filing fees. To attract borrowers, some banks offer to pay these

costs. Other banks will pay the closing costs when the equity line

is a larger amount. Some will pay closing costs but will charge a

higher interest rate.

Rate reduction for automatic debit: Some banks will lower their

interest rate if the borrower maintains a checking account and

allows the bank to automatically deduct the loan payments.

Introductory rate: Some banks offer a lower rate for a short

period to a borrower who begins using a home equity line right away.

Central Fidelity offers fixed interest rates for loans up to 60

months.

Some topics to consider when shopping for a home equity line of

credit:

How will I use the money?

It shouldn't be spent frivolously. By taking out a line of credit

secured by your home, you risk losing an important asset if you

cannot repay what you've borrowed.

How much do I need?

A home equity line can provide a significant amount of cash for

an array of uses. But by offering lower interest rates for larger

lines of credit, some banks make it easier for homeowners to borrow

more than they may need.

Is there a better way to borrow what I need?

Home equity lines offer flexiblity, but their variable interest

rates make the full cost of repayment less certain. Someone who

wants to know what the exact monthly payment will be or prefers a

payment schedule would be better off using a fixed-rate, fixed-term

home equity loan.

How soon do I expect to use the money?

By offering teaser rates, banks encourage borrowers to use their

home equity line right away. However, a low introductory rate won't

be helpful if you have no plans to use the money immediately.

How do I determine what the interest rate will be?

Most banks use the prime lending rate listed in the Wall Street

Journal as the benchmark for their rates on home equity lines. Among

banks in Hampton Roads, a typical rate is 9.5 percent - the prime

rate of 8.5 percent plus 1 percentage point. The prime rate is

listed daily in the Money Rates box of the Wall Street Journal's

Money and Investing Section.

How much credit will a bank make available to me?

That depends on the value of your home, what loan-to-value

percentage the bank uses and how much you owe on your home. A lender

begins with the appraisedvalue of the property and multiplies that

by the loan-to-value percentage. If a home has an appraised value of

$100,000 and the bank will lend up to 80 percent of that, it leaves

$80,000. If you have a balance of $40,000 on your first mortgage,

the bank deducts the $40,000 from the $80,000. That leaves $40,000,

which is what a bank would make available to a creditworthy

borrower.

Who will pay the closing costs?

These costs can amount to several hundred dollars, so it may be

worth considering a bank that offers to pay them. However, some

banks will offer a lower rate if the borrower pays the closing

costs. It's important to determine what the costs will be and then

compare them with the interest rate being charged.

Are there any annual fees or maintenance fees?

Many banks have eliminated these fees, but it's important to ask

about them when shopping for a line of credit.

How soon do I have to start repaying what I borrow?

Once a borrower has used a portion of their home equity line,

some banks allow them to make only interest payments and defer

repayment of the principal. To protect themselves, many banks

regularly review the creditworthiness of equity-lineborrowers. If a

borrower's financial condition has deteriorated, the bank may halt

the line of credit and demand the entire balance in one payment.

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