Home equity loan, line offers make a comeback, but be careful

Community banks, credit unions and major banks have shown renewed interest in making home equity loans and lines of credit, as home values climb in many markets and homeowners add to their equity or peek their heads above water for the first time in several years.

Originations of home equity loans exploded in the second quarter, with a 30 percent-plus increase compared with the first quarter, according to Experian, a credit reporting agency.

"This points to the improved equity position for many consumers because they now have equity in their homes due to price increases," said Alan Ikemura of Experian.

Consumers who want to borrow against their home need to understand a few points first. Lending standards are tighter now. Consumers can save money by shopping around for the best rates on the Internet and with local small lenders who may offer even more competitive rates.

The average rate on a home equity loan is 6.14 percent. The average rate on a home equity line of credit is 4.99 percent, according to Bankrate.com.

The trick, as always, is to have enough equity in the house. Take a home valued at $100,000 with a mortgage of $70,000. The homeowner would have $30,000 in equity, but forget about trying to borrow $25,000 or $30,000. Many lenders want the homeowner to retain 20 percent equity in the house even after taking out a home equity loan or line of credit.

Homeowners generally need a credit score of 720 or higher. They'll need to verify employment, offer proof of income and shop harder to find a home equity loan for smaller amounts, like $10,000. Bank of America's minimum for a home equity loan is $25,000.

Tips on home equity borrowing

• A home equity loan or line of credit could work, in some cases, for college tuition. But look into federal student loans first. The federal Stafford student loan does not involve a credit check. But remember if you default on a home equity loan or line of credit, you can lose the home.

• Rates on home equity lines are variable, while interest rates on federal education loans are fixed. Mark Kantrowitz of Edvisors.com noted that borrowers can get a fixed-rate home equity loan that is competitive with the federal Parent PLUS loan if they have excellent credit. But the home equity loan lacks the flexible repayment terms of federal education loans.

• Home equity loans are tax-deductible. Up to $2,500 on interest is also deductible for college education loans as an above-the-line exclusion from income, which means you can claim the deduction even if you don't itemize. But that deduction is phased out or eliminated at certain income limits.

• Talk to a tax professional about strategies that could work for you.

Home equity loan, line offers make a comeback, but be careful 08/30/13 [Last modified: Sunday, September 1, 2013 6:28pm]

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