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The ads are touting loans that are exactly as promised.
You can apply for a home-equity loan at any number of local financial institutions. Check the terms carefully, because they vary from one place to another. Some institutions even offer special, low-rate introductory terms.
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Assuming you have a good credit history, local lenders should be eager for your business. Your home will be evaluated by a licensed real-estate appraiser, and your home-equity line of credit will then be established. You will have to pay for the appraisal and other loan-closing costs, which can run into hundreds of dollars.
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Typically, the bank will extend to you a line of credit amounting to between 75 and 80 percent of the value of your home, less the amount of any outstanding mortgages.
For example, if your home is appraised for $240,000, and you still owe $110,000 on the mortgage, the bank should lend you up to $82,000. You can then draw the money as you need it by writing checks. You'll pay interest only on what you actually borrow. Most lenders set up a repayment schedule using a rate that is adjusted periodically to reflect current market rates.
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Consumers love today's home-equity loans and lines of credit for two very good reasons.
First, these loans are typically offered at lower interest rates than other consumer loans, like those for cars and credit-card balances. Second, the interest is fully deductible no matter the purpose for which the loan proceeds are used, as long as the loan is for $100,000 or less. By contrast, only 40 percent of the personal and consumer interest you pay in 1988 is tax-deductible (and that will drop to 20 percent in 1989, 10 percent in 1990 and zero in 1991 and later years).
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When you are faced with a choice between home-equity and consumer-loan interest, borrowing against your home is the sensible choice. Just make certain that you fully understand that the borrowed funds must be repaid according to the terms of the loan agreement. Even though you are borrowing against your home equity, the money is the bank's, and it must be paid back on time, plus interest. Otherwise, you stand to lose your home.
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But if you need to borrow and you are confident that you can meet the repayment schedule, a home-equity loan is one of the very best and most convenient ways to borrow money.
With bankers touting and wonderful tax and financial benefits of home-equity loans and lines of credit, it's not surprising that billions of dollars' worth of such loans have been written over the past two years.
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Unfortunately, however, some problems have developed. Congress has heard testimony that some lenders have unilaterally amended and revised the terms of their loan contracts, forcing borrowers to pay higher interest costs. Other lenders, in some instances, have prematurely called their loans even though borrowers have complied faitfully with all loan conditions.
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As a result of such practices on the part of only a handful of lenders, Congress may soon require bankers to disclose more fully all loan conditions and practices, and it may restrict them from revising loan terms after the contract is signed. In a time of rising interest rates, however, it is unlikely that a lender will call a loan, especially one with adjustable rates.
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