Experts Urge Caution in Home Equity Loans : Finance: The rates are appealing, but some loans call for balloon payments or have hidden costs that could cause an owner to lose the property.

Home equity loans have developed a fast following in these troubled economic times as more homeowners find themselves debt-ridden and cash-strapped.

Loans based on home values can give consumers tens of thousands of dollars at relatively low interest rates. And unlike other loans, the interest in many cases is tax deductible.

But experts warn that homeowners should exercise a great deal of caution before using their most valuable possession as collateral.

“The house is the last major remaining asset folks have, and banks are all too willing to loan against the house because the loans are fully collateralized,” said Robert K. Heady, publisher of Bank Rate Monitor, a weekly newsletter based in North Palm Beach, Fla.

Experts say the appeal of home equity loans--with interest rates hovering one to three percentage points above banks’ prime rate--should grow as rates continue to decline. The prime rate for most major banks stands at 10%, however, a few institutions recently lowered their rates to 9.75%.

Rates remain much higher on unsecured bank loans. The average interest rate charged on a bank credit card was 18.83% in December, up from 18.60% at the start of the year, according to Bank Rate Monitor. The average rate for a bank personal loan was 17.34%, up from 17.19% in January, the publication said.

For home equity loans, banks typically lend up to 80% of a home’s appraised market value minus the amount owners owe on their mortgage.

More than $50 billion was lent out through home equity lines of credit in 1989, and that figure is expected to grow 15% to 20% in 1990, according to the American Bankers Assn.

Despite their growing popularity, experts warn, these loans can contain many hidden costs that could run into hundreds of dollars, such as closing costs, application fees and appraisal fees.

Also, if the prime rate rises, consumers with variable rates tied to the prime can be hit with a big jump in their monthly payments.

Particularly risky is a so-called balloon note--a loan that calls for payments only on the interest for the first several years. After that, the borrower must cough up payments on a big principal.

For those homeowners who don’t need cash right away but want the flexibility of long-term loan access, the option of choice is taking out an extended line of credit against their home’s value.

However, a few banks penalize consumers who don’t borrow money from the credit line, charging them an annual “non-usage” fee that can be about $50, Heady said.