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It's On the House

Not long ago, consumers turned to home equity loans mostly to fund such projects as remodeling the kitchen or building a deck. Not anymore.

Today, people borrow against their home equity to consolidate debt and to pay for medical bills, college tuition, cars, business start-ups -- as well as home improvements.

Borrowing against home equity takes two forms: loans and lines of credit. A loan has a fixed rate for a set dollar amount and time period. A line of credit is a revolving credit that can be tapped as needed, up to a maximum amount, over a typical term of 5 to 15 years. The interest rate is variable, tied to some index such as the prime rate, and thus can climb later.

Low rates are one reason for soaring popularity of home equity loans and lines of credit over other forms of borrowing. An added plus is that the interest paid usually is tax deductible.

Brenda Jackson, the VP of Lending at Fairfax County Federal Credit Union, Fairfax, reports that a major use of home equity lines among FCFCU credit union's borrowers is to consolidate debt. "Members want to get rid themselves of their high-interest-rate credit cards and free up their cash -- and get a tax deduction," she explains. Some analysts worry that consumers might binge on home equity borrowing, just as they've done with credit cards.

Put Your Home Equity to Work

If you're a homeowner, you work hard to pay for your home. Maybe it's time to put your home to work for you--with a home equity loan or line of credit.

With a home equity loan or credit line, the equity you've built serves as collateral. Equity is the difference between your house's market value and the amount outstanding on your mortgage. So, if market value is $150,000 and the mortgage balance is $100,000, your equity would be $50,000. Typically, lenders will allow you to borrow an amount equal to 95% of your equity, or $47,500 in this example.

You can use a home equity loan or credit line to borrow for home improvements, college tuition, a new vehicle, a vacation, medical bills, a family wedding, starting a home-based business, and any number of other major expenditures.

Borrowing with a home equity loan or credit line offers two key benefits:

* The interest rate will be lower--usually much lower--than what you'd pay on a credit card or personal loan. The lender can offer you a lower rate because your house secures the loan or credit line.

* The interest you pay on a home equity loan usually is tax deductible, which further reduces the cost of borrowing. Consult your tax adviser to find out what deductions you can take.

When borrowing on home equity, you have two credit forms to choose from. A home equity loan is a lump sum you borrow at a fixed or variable interest rate. You'll pay back the loan over a 10- or 20-year period, but the loan term might range from five to 30 years. If it's a fixed-rate loan, which is most common, your monthly payments stay constant throughout the loan term.

A home equity credit line is an open credit line you can draw on as needed, up to a preset limit. Usually a home equity line of credit carries a variable interest rate tied to some sort of index, such as the prime rate. As you pay off past borrowings, you replenish the credit line up to your dollar limit. You can tap a home equity line of credit again and again, without having to reapply for a loan each time you borrow.

Call a credit union representative for help deciding which form of home equity borrowing is best for you. The answer usually depends on how you plan to use the funds.