HOME EQUITY LOANS: CONSUMERS LOOK TO DEDUCTIBLE INTEREST

When John D. looked at the interest costs on a new car, he opted to keep his old one.

That was in 1990.

"I traded this year," he said. "I looked into a home equity loan and found that the interest was a tax deductible item."

John is just one of a growing number of consumers who have found home equity borrowing to their liking.

Local bank spokesmen say homeowners are increasingly borrowing through home equity, or second-mortgage loans, using their homes as collateral.

A recent survey by the Consumer Bankers' Association found that home equity credit accounted for 42 percent of all consumer credit by the end of 1990 (not counting credit cards). "Closed-end" second mortgage loans also grew, about 18 percent in 1990.

"A lot of people are going to the home equity loan," said Butch Holyfield, manager of the real estate department at Boatmen's Bank of Cape Girardeau. "The simple reason for the increased activity is the income tax deduction on the interest."

Interest up to $100,000 of home-equity debt is tax deductible the only kind of consumer credit that carries that tax benefit.

In addition, the interest rates are based on the prime rate. Banks charge from one and a half to two percent over prime, which tabulates into 10.5 to 11.5 rates these days.

Mrs. Jeff Hawk, real estate loan officer at Mercantile Bank of Cape Girardeau, agrees that home equity loans are gaining popularity.

"The home equity loan came into being in the mid-1980s," said Hawk. "But people didn't give it much thought at that time. When the government eliminated consumer loan interest tax deductions, people started looking more closely at the home equity loan."

"We really haven't had that great a demand for the home equity loans," aid Charles Daniels, president of Capital Bank in Cape Girardeau. "We've had some interest from a few customers, but a lot of people here don't utilize the long form on taxes, so it's not a big advantage to them."

Bank officials explain that the home equity loan is a revolving line of credit, compared to the second mortgage loan, which is a fixed loan, for a certain amount of money repayable over a specified number of months or years.

For example:

A homeowner obtains a $15,000 home equity loan, and agrees to pay $75 a month plus interest costs. The $75 applies to the principal. At the end of a year, the principal has grown to $900. That $900, or any part of it, may be used without negotiating a new loan.

"You're not limited to $75 a month principal," said Holyfield. "You can pay as much as you want. The more you pay, the faster the available funds for borrowing grow."

How do you determine your qualifications for a home equity loan?

Most banks use a similar formula up to 75 percent of the appraisal value, minus the first lien.

"People are using home equity loans for a variety of reasons," said Holyfield. "Probably the biggest two reasons are new car purchases and home improvements."

Hawk added that "debt consolidation" ranks pretty high on the list of reasons.

Spokesmen say such loans are also good ways to raise needed cash, but like any major loan, they should not be entered into lightly.

"People should look into both the home equity and fixed rate second-mortgage before making a final decision," said Hawk. "In some cases, such as a major home improvement project, the traditional second mortgage may be the better deal."

Consumers are reminded that using a home-equity loan puts your home on the line if you can't repay. Although repayment terms are liberal, consumers don't have to stick to the minimum payments. Instead, consumers are urged to set up a schedule to repay the loan at least as rapidly as if they were using another kind of borrowing.