Take Equity Line With Care

Homeowners of any age need to proceed cautiously if thinking about a home equity line of credit or a home equity loan. They come with advantages and disadvantages - financial knives that can cut both ways.

Current evidence of a “bad” cut is higher delinquency rates for borrowers repaying the lines of credits and loans, according to the American Bankers Association.

For 1996’s fourth quarter, the delinquency repayment rate for equity lines of credit topped 1 percent for the first time since the ABA began tracking the rate in 1987.

Lenders began promoting equity lines of credit earlier, in the 1980s.

A main selling point in recent years has been using them to consolidate several high-interest credit card debts into a single, lower-interest loan payment.

Lines of credits were considered improvements on home equity loans, which used to be called second mortgage loans and which long have been available for homeowners who wanted to tap their home equity that was not covered by first mortgages.

For 1996’s fourth quarter, the delinquency rate on home equity loans was 1.42 percent, up from 1.29 percent the previous quarter.

The No. 1 advantage of equity loans or lines of credit is that the interest you pay - with certain limitations - is usually deductible from your taxable income, unlike interest on credit cards, which is not deductible.

The No. 1 disadvantage is that you are swapping unsecured debts - the credit card debts - for a secured debt.

The equity loans or lines of credit are secured by your home and, even if you encounter financial difficulties later, they must be paid on time to prevent foreclosure.

This danger is potentially greater with equity lines of credit than with equity loans because it’s easier to maintain high debt with equity lines.

With both equity loans and equity lines of credit, you normally can borrow up to 80 percent of the equity in your home after deducting the first mortgage outstanding.

But with the loans, you receive the amount in a lump sum with a fixed interest rate that has to be repaid within a fixed time.

Many equity lines, however, are open-ended with adjustable rates and a maximum amount that can be borrowed at any one time.

You are given checks or an ATM card to draw the funds as needed. As you pay down the line, you generally are able to borrow the funds again.