Home equity lines of credit, a variation of a traditional second mortgage, took off following the 1986 tax reform, which allowed the interest to remain tax deductible. Concern quickly grew that consumers might fritter away their most valuable asset: their homes. However, evidence suggests that a majority of borrowers are careful with home equity loans. Today, they remain popular as people tap into equity for renovations, to pay off bills and other purchases.

The Stephenson National Bank & Trust (SNB&T) seeks to educate consumers and arm them with information on common bank products. Knowledge is the key to help customers in the decision-making process.

Home equity loans and lines of credit are convenient and popular financing tools. Borrowing against home equity is a cost effective source of credit, while interest rates are about half the cost of credit cards. Also, unlike credit card debt, interest paid on a home equity line generally is tax-deductible. Consumers should consult their tax advisor regarding this.

Consumer demand has spurred the growth of home equity lines of credit, thanks in part to low interest rates. Statistics show that consumers are beginning to use home equity lines of credit more than home equity loans.

For the most part, consumers use home equity products carefully. In 2005, consumer delinquencies were low – 97 percent of home equity loans were paid on time while less than half of 1 percent were past due. These delinquency ratios were the lowest of any consumer loan.

Bankers recommend home equity loans for major goals. Low rates make these loans an attractive option for homeowners looking to pay off other debts, such as credit cards, or to finance a major expenditure like college education, home improvement or medical expenses. Keep in mind:

·      Use prudently since defaulting on such a loan can put the home at risk.

·      They should not be used to cover living expenses.

·      Use with caution when purchasing items that depreciate in value over time.

To decide whether a home equity loan is right for you, the American Bankers Association advises prospective borrowers:

·     Short-term vs. long-term debt. Real estate is a “long-term asset.” If you use your home for additional credit, the proceeds from the loan can go farther if used to finance those assets - for example, renovations that increase your home’s value.

·     How much is too much? Be sure you know how much money you need to borrow and for how long you need it so that you are not paying interest longer than necessary.

·     Compare all costs. Look around for the best home equity loan and be aware of the various fees when weighing the benefits. “Home equity loans are essentially another mortgage,” advises John Kakuk, SNB&T assistant vice president/consumer loan officer. “Look at the fine print for the actual closing costs involved, pre-payment penalties or any other charges.”

·     Ask questions and understand the answers. It’s important that you feel comfortable with the lender, the process and the outcome. If you have a question - ask. Educated customers are the best consumers.