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Loans stars Experts say home equity borrowing can be a smart way to finance a needed big-ticket expense

by KRISTI L. GUSTAFSON,
Staff writer The Times Union
Monday, August 2, 2004

Boy, how great your house would look if you added on a garage. Remodeling the kitchen or the bathroom while you're at it would be nice.

Your son heads off to college next year, too, and your 1993 sedan has been in the repair shop an awful lot lately. It might be time to take out a home equity loan -- essentially borrowing against the difference between the current value of a house and the amount of money owed on the mortgage.

With some banks, you can borrow up to 125 percent of the equity in your home. Most, though, do not go above 100 percent because of the risk associated with the loan.

Keep in mind, though, that there's risk to the borrower, too. You can lose your home if you're unable to pay back the amount, says Gary Herman, president of Consolidated Credit Counseling Services, a national organization based in Fort Lauderdale, Fla.

"If real estate value doesn't go up, people can be upside down on their house when they go to sell it," says Herman, who nonetheless thinks the loans are a great option if done cautiously. "If they are in a situation where they have to sell, people can have to pay money on the house at closing because they've borrowed more than the house is worth."

Still, home equity loans are hot. With the recent rise in mortgage rates, the refinancing bandwagon has virtually ridden off, according to Jodi Druzba, assistant vice president and branch manager with M&T bank in Clifton Park. And fewer people are applying for new home loans, instead opting to make improvements or upgrades to their current digs.

Deferred maintenance

A recent survey by Lending Tree, an online financial services firm that offers home equity loans, found a dramatic increase in their use over the last three years.

"It's great for people who want money but not a huge sum," says Norm Bour, host of the nationally syndicated radio show, "The Real Estate & Finance Show." "With real estate markets going up, people are catching up on a lot of deferred maintenance."

Before you walk into a bank or go online to apply for credit, know your options. (Shopping around is important, too, since closing costs can range from nothing to a couple thousand dollars, says David Herpers, director of consumer affairs with Amerisave Mortgage, a national mortgage broker.) You've got home equity lines of credit, home equity loans and, less popular, general purpose loans -- for people who have no equity in their homes -- and each have their own pros and cons. No matter which you choose, financial experts say your combined mortgage and loan payment should not exceed one week's take-home salary, so you can pay it back comfortably, according to Druzba.

"If you have trouble making payments on a second loan, you can go into bankruptcy and lose your home," Herman says.

Home equity lines of credit (also called HELOCs)

What is it?: HELOCs offer the most flexibility and work something like credit cards, with five- to 10-year draws, or availability of funds. Consumers have a line of credit they can draw down for expenses when they need to, and they only pay interest on the amount they actually use. Typically, people can borrow up to 125 percent of the equity in their homes. They can pay the line down with regular payments and draw upon it again in the future without taking another loan. The payback amount depends on how much you use.

 
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