Your Mortgage : Tips on Equity Lines, And Who’s Using Them

If you’re one of the estimated 8.2 million American homeowners who have both a regular first mortgage and a home equity line or second mortgage, welcome to the credit elite.

New national studies suggest you’re different: Your house is worth more than the average homeowner’s. You have above average income, excellent job stability, and you’re highly likely to have completed college or gone to grad school.

If you’re the average home equity line borrower, according to new data compiled by the Consumer Bankers Assn., a national trade group, you’re between 35 and 49, your house is worth about $156,000, you’ve owned it for nearly nine years, and you’ve been employed at the same company for over eight years. You earn about $56,000 a year.

Not surprisingly, therefore, you’re a good bet to pay back your equity line without falling behind. Less than 1% of all home equity borrowers miss payments--a far lower rate than other forms of consumer debt and many first mortgages. A minuscule 0.14% ever have to be foreclosed. Yet you pay the bank a profitable rate on your equity borrowings--an average 1.7 percentage points above the prime rate, up from 1.59% just a year ago.

So no wonder all those banks and mortgage companies are flooding you with “tap-your-equity-now” pitches. You’re gilt-edged.

What are you doing with your home equity line or second mortgage? The new Consumer Bankers study found that the biggest single use of home equity dollars in 1994 was debt consolidation. Fully 30% of credit lines and 43% of traditional second mortgages went to essentially rearrange--and cut the monthly costs of--existing charge accounts, education loans, car loans and home mortgage debt.

Second most frequent use: financing home improvement projects, which accounted for between 22% and 24% of all equity loan activity last year.

In third place: auto purchases, a home equity expense category that barely existed before 1986, when Congress removed the tax deductibility of ordinary consumer loans. Why pay credit company rates in the mid-teens for a $15,000-to-$20,000 auto loan, homeowners in the ‘90s have decided, when I can tap my real estate equity at prime plus 1 3/4%, and write off the interest payments to boot?

Next most frequent uses--paying education expenses, business and investment debts, vacations, taxes and medical costs.

One potentially ominous note that popped up in the study’s data: In the event that interest rates in the overall economy rise rapidly some time in the future, the vast majority of home equity borrowers tied to monthly or other rate indexes could be in for nasty shocks.

That’s because only 21% of lenders have put rate caps on their home equity lines, and just 30% on their second mortgages. Consumer-friendly annual caps to protect borrowers from rapid payment jumps are the rule, by contrast, on adjustable rate first mortgages. Equity loan applicants might well shop around to find a peace-of-mind, rate cap deal, rather than one that leaves you naked in economic storms.

Another study of homeowners with equity lines or second mortgages offers still more insights into who they are and why they borrow. Based on interviews with more than 2,500 homeowners by Richard Curtin of the University of Michigan Survey Research Center, the study found that among home equity line borrowers, the odds are strong that they’re well-educated. In 1994, according to Curtin, “The use of home equity lines of credit was highest among homeowners with some schooling beyond a college degree (16%). . . . Homeowners with the lowest level of formal education (4%) were the least likely to have home equity credit lines.”

The University of Michigan study, sponsored by the American Financial Services Assn., also found that:

Although there is a generally high degree of awareness about the consequences of failing to pay back home equity lines of credit, a surprisingly large 16% of such borrowers in 1994 were not aware that the worst consequence of non-payment is foreclosure of their home.

Mandatory federal truth-in-lending disclosures were rated “useful” by two-thirds of home equity loan borrowers, but only 8% said such disclosures in any way affected their ultimate decision to take out the loan.

Home equity loan borrowers may be well-educated, solid citizens, but they’re apparently not aggressive shoppers for their credit. Just 40% of equity line and second mortgage borrowers said they actively shopped around at other financial institutions for better credit terms than what they got.

Any way you slice it, that’s not smart.

Distributed by the Washington Post Writers Group.