House-Rich

By GEORGE J. CHURCH

Where is all this money coming from? True, we're living in a time of record employment, rising wages, a bloated stock market and a flock of newly hatched dot.com millionaires. But even these indicators of prosperity don't add up to the consumer-spending spree that characterizes the current U.S. economic boom. There's something else.

The answer is in your attic, also in your bedroom, kitchen and other parts of your home that represent the equity you, like millions of other Americans, have built up over those years of paying down mortgages. Lenders are willing--even eager--to advance you cash up to the full amount of that equity. And sometimes even more. Like millions of other homeowners who have taken up the offer, you can spend the money any way you want and take years to repay--at some of the cheapest interest rates you'll ever find, even after the Federal Reserve's latest hikes.

How come? The Federal Reserve figures that the stated interest rate on home-equity loans averages 9.5%, only half the usual credit-card rate. Even more important, the interest on a home-equity loan can usually be deducted on the borrower's tax return. In some cases, these tax savings can bring the effective interest rate below 5%. Now, that's a deal!

It's one of the last deals to survive the 1986 tax reform, which snuffed out breaks on a wide range of consumer loans. The reform left home-equity loans in a virtual monopoly position that has in turn ignited a lending boom. By next year the total of outstanding home-equity loans--after subtracting repayments--is expected to hit $500 billion, vs. $34 billion in 1988. New borrowings have gone as high as $268 billion a year.

Home-equity loans are available at fixed or variable interest rates. Householders can borrow a lump sum or set up a revolving line of credit that they can tap into as they please; amounts repaid can be borrowed again. Though such loans were once used for home expansions and remodelings, today's householders are borrowing for all sorts of purposes. Among them:

Debt Consolidation. Wanda Storey, a Miami paralegal, has just swung a $13,000, 9.5% home-equity loan. She used it to pay off $6,100 of credit-card borrowings on which she was being charged 22% interest, and a $6,900 loan at 18% for a vacation time share. Her saving: $150 in monthly payments, plus a tax reduction she has yet to calculate.

College Tuition. Janet Tedesco, a high school teacher in Metairie, La., and her husband Ken, a college development officer, arranged a $65,000 line of credit in 1997. They are using it to put two children through school--Kerri, who graduated from Spring Hill College in Alabama in May, and Philip, a sophomore at Notre Dame.

Multipurpose. Harold Halpern, an Atlanta tax accountant, has used home-equity loans to buy, among other things, an Isuzu Trooper, a vacation home and an adjacent lot. Currently, he is drawing on a $60,000 line of credit to finance his highly seasonal business, which gets nearly all its revenue during spring tax-preparation time but must pay bills year-round.

Rising interest rates could eventually cool the fervor. But so long as interest is tax deductible, home-equity loans will remain relatively cheap--a point stressed by lenders who are pushing them with manic zest. In Atlanta homeowners often get several phone offers a day. At a Columbus, Ohio, Bank One branch, customers who applied on the spot were given a rose and approved or rejected within 50 sec. of completing their application (assuming the information they supplied was accurate). Aames Home Loan Co. in Westbury, N.Y., has been mailing Long Island homeowners unsolicited facsimile checks for as much as $96,250, with a letter stating, "You may be a quick phone call away from an Aames home equity loan." Says Gabriel Moreno, a vice president of New Orleans-based Hibernia National Bank: "Every bank is after these loans," in part because "the risk is almost nonexistent. People will pay their home loans before any other bills."

Credit counselors, however, see considerable consumer risk. Some lenders will advance 125% of equity to borrowers, who may be unaware that some of the interest will not be deductible (deductibility is limited to loans of no more than 100% of equity, up to a maximum of $100,000). Also some lenders target people who have missed loan payments or declared bankruptcy and may not realize that their homes will be seized if they once again miss payments.

Even solvent borrowers can get in trouble--usually those who use home-equity loans to pay off high-cost debt, then max out credit cards all over again and wind up with more burdensome payments than ever. Like all credit, home-equity loans can be a blessing to disciplined borrowers--and, so far, to the economy in general--but a curse to the imprudent.

--Reported by Deborah Fowler/Houston, Anne Moffett/Washington, David Nordan/Atlanta and Megan Rutherford/New York

With reporting by Deborah Fowler/Houston, Anne Moffett/Washington, David Nordan/Atlanta and Megan Rutherford/New York