IF YOU'RE ONE of the millions of American homeowners with an active credit line tied to the equity in your house, the odds are strong that you're not using the money to fix up your property, pay for college tuitions or invest in a business venture.
A new national study of home-equity borrowers reveals that, while home improvement used to be the main reason people took out home equity loans, borrowers now tap their real estate equity primarily to pay off high-cost credit cards, charge account and personal loan balances with lower-cost, tax-deductible home equity dollars.
The new study, conducted by two University of Virginia professors for the Consumer Bankers Association -- a banking trade group -- found that 36 percent of all home equity credit-line borrowers and 40 percent of fixed-term home equity loan borrowers now describe their principal reason for borrowing as debt consolidation.
The study covered the loan files of a nationwide sample of lenders.
Fixed-term home equity loans are second mortgages that provide borrowers with a lump sum of money that must be paid back by a fixed date, typically in five to 15 years. Fixed-term equity loans almost always carry fixed interest rates. Home equity lines of credit, by contrast, typically carry adjustable rates.
Borrowers are approved for a maximum line of credit secured by their house and can draw down on the approved amount as they choose. They pay interest only on the amount of the line they've actually drawn down.
The average American home equity borrower, according to the study, is 35 to 49 years old and has an annual household income of between $54,000 and $65,000. He or she lives in a house valued at between $138,000 and $171,000, with an existing first mortgage or deed of trust between $75,000 and $84,000. Home equity line borrowers tend to borrow more -- an average line is about $40,000 -- than fixed-term borrowers, who take out equity loans averaging $25,000.
As recently as 1992, home equity borrowers said their main purpose in getting a second loan was to make improvements to the house. Now only 27 percent of equity line borrowers use the proceeds for property fix-ups.
Nine percent use their equity funds to pay for educational expenses, 6 percent buy cars and 3 percent use the money for investments. Most credit-line borrowers actively tap into their equity accounts during the course of a year -- 11 times on average, according to the study.
Although most equity-line borrowers access their accounts via checks, 37 percent of the lenders surveyed allow them to use automated teller machines (ATMs), 43 percent allow access over the phone, and 17 percent offer home equity-line credit cards. Using such a card, homeowners can charge a meal at a restaurant -- or a bag of groceries at the supermarket -- by tapping their home equity nest egg, at tax-deductible rates.
Lenders promote home equity loans aggressively in part because they are less risky than other forms of credit. The study found that, whereas 1.77 percent of traditional categories of consumer finance -- auto loans, boat loans, personal loans -- are 30 days or more delinquent on average, just 1.37 percent of equity line borrowers are behind on their monthly payments.
Banks also like the fee income. Equity line borrowers paid an average $346 in fees last year, up from $224 in 1995 and $197 in 1994, according to the study. Fixed-term equity loan borrowers paid an average $459 per loan last year vs. $200 in 1995.
The study found that two-thirds of the lenders surveyed now offer programs permitting borrowers to take out equity loans or credit lines that, when added to the debt balance on their primary mortgage, equal the total appraised value of the home. You might, for example, have a first mortgage of $150,000 on your $200,000 home, and then take out a $50,000 equity loan. In the past, lenders rarely allowed the combined first mortgage and equity loan to exceed 80 percent to 90 percent of the value of the home.
Three percent of the lenders said they now make equity loans where there's negative equity -- the combined first and second mortgages equal 101 to 125 percent of the home's appraised resale value.
Pub Date: 7/06/97