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.
Dulce Gomez-Ortiz, Centralized Lending Manager at PFCU, reports that a major use of home equity lines among his credit union's borrowers is to consolidate debt. "They want to get rid of their high-interest-rate credit cards and have a better cash flow -- and get the tax deduction," she explains.
Some analysts worry that consumers might binge on home equity borrowing, just as they've done with credit cards. Gomez-Ortiz says she's seen little evidence of problems yet.
"When a member does a line of credit for debt consolidation and then comes back again for the same thing, we have a little talk." she says. "We let them know they can't do that because they're ruining the equity they have in their house."
Copyright 2008 Credit Union National Association Inc. Information subject to change without notice. All other rights reserved.