Home equity loans still booming

Nation's Housing

September 29, 1996|By Kenneth R. Harney

ONE OF THE most valuable federal incentives set aside for homeowners -- the ability to borrow money for consumer expenditures and deduct interest payments on federal tax filings -- has become virtually the preserve of baby boomers with higher-than-average incomes.

A study of home equity lending by the Consumer Bankers Association finds that the typical borrower with a home equity line of credit is between 35 and 49 and has an annual household income close to $60,000.

The No. 1 reason for taking out the credit line, according to the study: to pay off higher-rate consumer debt such as credit card balances and unsecured personal loans with lower-cost home equity dollars.

A homeowner with $25,000 in credit card and revolving charge account debts at 17 percent and 18 percent can roll them together and replace them with a home equity line of credit carrying a rate of 9 1/2 percent or less. The home equity line interest also is likely to be deductible for federal tax purposes, lowering the after-tax effective rate paid by the owner well below 9 1/2 percent.

By contrast, a renter with $25,000 in high-rate personal debt has no tax-assisted alternative. Interest payments on unsecured personal loan debts under the federal tax code are not deductible. The interest on home equity-secured loans or lines up to $100,000 generally is deductible on principal residences. Home equity loans usually carry fixed repayment terms typically ranging from five to 15 years; credit lines allow a borrower to draw down varying amounts as needed.

The new study examined home equity loan portfolios at a representative group of financial institutions across the country with assets of $100 million or more. The institutions surveyed have more than 1 million equity loans or lines of credit outstanding, with an aggregate value of $36 billion.

The study found that at the financial institutions surveyed this year, aggregate home equity-related credit "now represents over half of all consumer credit." Equity lines of credit alone represent 34 percent of all consumer credit, excluding unsecured credit cards.

Banks flood consumers with home-equity offers because they're profitable and carry relatively low risk of default -- sometimes lower than even primary mortgages. In the new survey, the average home equity line borrower not only was a baby boomer jTC with a solid income, but highly stable in his or her profession and place of residence (owned the same home for the past nine years).

After debt consolidation, the second most common use of home equity loans or lines of credit was for home improvement projects. But fully 9 percent of home equity loan borrowers and 8 percent of borrowers with lines of credit now use their equity dollars to buy or finance their personal automobile. Other top uses for credit lines: to pay for education expenses, business investment, vacations, tax bills and medical bills.

Pub Date: 9/29/96

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