Equity growth gives rise to borrowing

By Sandra Block
USA Today

Lots of people go to Las Vegas hoping to win big at the casinos. But the best odds may reside in the fast-growing subdivisions that surround Sin City.

Since the second quarter of 2003, the median home price in the Las Vegas metropolitan area has soared more than 52 percent. While that increase is over the top, home prices in many parts of the United States have risen more than 20 percent in the past year, according to the National Association of Realtors.

Many homeowners are taking advantage of the sharp rise in real estate values by borrowing against the equity in their homes. While interest rates creep higher, the average rate on a home equity line of credit is still about 4.7 percent. Interest on home loans is usually tax-deductible.

But this great deal may not last much longer, because rates on home equity lines are variable. Most are linked to the prime rate — the rate that banks charge their best customers. The Federal Reserve Board has signaled that it will continue to raise short-term rates this year, which would push the prime rate up.

Many experts think rates will continue to rise through 2005. You should take that into account when deciding how much you can afford to borrow, says Keith Gumbinger, vice president of mortgage consultant HSH Associates.

Other strategies to insulate yourself against rising rates for home loans:

• Take out a home equity loan instead. With a home equity line of credit, you borrow against your home on a revolving basis. You can borrow as much or as little as you need, up to the loan limit. With a home equity loan, you receive a lump sum and pay it off over a fixed amount of time. The interest rate remains the same for the life of the loan.

Home equity loans have higher interest rates than lines of credit. The average rate for a home equity loan is 6.91 percent, according to Bankrate.com. But suppose you need money for a one-time purchase, such as a wedding or car, and you know you'll need several years to pay it off. A home equity loan offers the security of a fixed rate, says Doreen Woo Ho, president of Wells Fargo's Consumer Credit Group. If rates on home equity lines go above 7 percent in the next year or two, you'll be very happy with your fixed-rate loan.

• Use discretion. Many lenders offer their lowest rates on lines of credit for $50,000 or more, says David Herpers, director of consumer affairs at mortgage lender Amerisave. But just because you have a line of credit for $50,000 doesn't mean you need to use it. One of the advantages of lines of credit is that you can borrow only as much as you need.

If you plan to use your line of credit sporadically, make sure that your loan doesn't have a nonusage fee, Herpers says