GO EASY ON HOME-EQUITY LOANS
Homeowners are unlocking the equity built up in their homes like never before. But before opening the
home-equity loan door, be certain you don’t overextend yourself and put your home at risk, caution
With home values climbing dramatically in many regions in recent years, homeowners have piled up
record amounts of home-equity-based loans, including a 35 percent increase in 2004, according to SMR
Research Corp., a business and market research firm. Homeowners are tapping their equity so heavily that
credit card companies are feeling the competition and are getting into the home-equity loan business. And
traditional lenders of home-equity loans, such as banks and credit unions, are providing various incentives
to encourage people to borrow against their home.
The most popular type of home-equity loan these days is the home-equity line of credit—HELOC for short.
HELOCs operate much like the line of credit in a credit card. The lender determines the maximum amount
you can borrow against the equity in your home. You can borrow any amount up to that limit and the
interest charges apply only to the amount you borrow. Rates typically are around the prime lending rate,
which was 5.5 percent in February 2005.
Say the line of credit is $30,000 and you borrow $4,000, leaving $26,000 available for additional borrowing
later. The interest charges are based only on the $4,000, not the $30,000 credit limit, just as they would be
on a credit card. You might borrow $4,000 today, pay part of it back, then borrow $7,500 a few months
later. Flexibility is the key to HELOCs.
And just as credit card interest rates fluctuate, so do interest rates on HELOCs. Lately, after record lows,
those rates have risen as the Federal Reserve has raised short-term interest rates.
That’s where the second type of home-equity loan comes in: the fixed-rate home-equity loan. Here, you
take out a fixed amount at a fixed interest rate and make fixed payments for a specific