| The practice of borrowing against the value of
a home has skyrocketed in popularity.
There are two key reasons for this surge: low
interest rates and tax deductibility.
When tax changes in 1986 eliminated deductions
for most consumer purchases, home equity loans
became a way to buy goods and still get a deduction.
Let's say you bought your home for $95,000 and
made a 20 percent down payment of $19,000. You
then took a first mortgage to pay the remaining
$76,000. On the day you closed on your home, you
automatically had 20 percent equity. You gain
equity as you pay off the principal and your home
grows in value.
Let's say you've paid $12,000 toward the principal
and your property -- valued at $95,000 when you
bought it -- is now worth $115,000. Your beginning
equity ($19,000), plus the principal you have
paid ($12,000) and the increase in your property
value ($20,000) gives you $51,000 in equity.
Banks and borrowers love it
Equity is a valuable asset because you can put
it to use without having to sell your home. And
because most people's domicile is their biggest
asset, lenders regard home equity loans as secure.
For that reason, interest rates are lower than
for other loans.
The average rates for a home equity line of credit
or for a term equity loan are available from Bankrate.com's
current survey of 4,000 banks around the country.
Home equity products usually have a higher interest
rate than first mortgages. But compare home equity
loan costs to your credit card or department store
charge cards. Check out Bankrate.com's current
credit card rate survey, then figure in a tax
deduction on your home equity loan, in most cases
for up to $100,000 of borrowed money, and you've
got yourself a deal.
The scary part is that if you default on the
loan, the lender could foreclose on your home.
That's why these loans are statistically most
suited to stable, middle-aged borrowers. The average
home equity customer is 35 to 49 years old with
a household income of $63,000, according to the
Consumer Bankers Association. Fifty- to 65-year-olds
are the second biggest borrowers of home equity.
Most have held the same job and owned their home
for about eight years. Less than 2 pecent default
on their loans.
"Home equity customers tend to be very good
at paying back their loans," says Bill Hampel,
chief economist for the Credit Union National
Association in Washington, D.C.
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