New jersey home equity loan

It wasn't planned that way, but Congress's massive tax-reform plan is about to encourage you to put your home deeper in hock.

Homeowners by the millions are expected to turn to home-equity loans-a form of second mortgage-to circumvent tax reform's taboos on deductions for interest paid on credit-card purchases and all other kinds of consumer debt.

Under the reform plan expected to be voted into law later this month, deductions for consumer interest will gradually disappear over the next five years. But the mortgage-interest deduction will stay alive. As a result, many homeowners may trim taxes by financing vacations, new cars and furcoats with a home-equity loan. If they decide to take the loan in the form of a revolving-credit line-and tap the line only when needed-they pay interest only on the portion of the credit used.

"Home-equity loans will be the only game in town," predicts Bob Trinz, a specialist at Prentice-Hall, which publishes tax guides. "The could be the primary loan product of the future," agrees Carl Harris, a vice president at People's Bank in Bridgeport, Conn.

Under the new rules, however, the length to which you can go to mortgage your house for other purposes will shrink considerably from what it is now. Mortgage interest will be deductible on first and second homes only to the extent that the loan does not exceed the original purchase price of the home-not its market value-plus the cost of improvements you've made. You can deduct more only if the loan's proceeds are used to pay for education, medical expenses or further home improvements.

Room to maneuver

Even when restricted that way, the provision leaves owners who have had time to build up equity plenty of room to maneuver, says Gary Blum, a tax partner with the accounting firm Seidman & Seidman. Suppose you bought your home for $100,000 and have since added an air-conditioning system and a new driveway for $15,000. If your mortgage is paid down to $50,000, you could borrow $65,000 for whatever reason and deduct the interest.

Banks limit what they will lend against a home, of course. Generally, the maximum loan is equal to 75 or 80 percent of the home's appraised value, minus whatever is owed on the first mortgage. So the person in Blum's example might in fact qualify for a home-equity loan of $36,250 if the house were valued at $115,000.

As it stands, these provisions will apply even to home-equity loans that have already been taken out. If you have borrowed more than the home cost, plus improvements, your excess deductions will be phased out by 1991.

To compete for customers seeking home-equity credit lines over the next few months, many banks will offer low interest rates and low fees on such loans. Buffalo, N.Y.-based Goldome Federal Savings Bank, with $60 million outstanding in Home Equity Line of Credit balances, expects its current direct-mail and advertising campaign to increase home-equity lending by $225 million over the next six months. Goldome is charging new customers interest 2 percentage points above the bank's prime rate, with an application fee pf $250($350 In the New York metropolitan area). Closing costs, which run 2 to 2 1/2 percent of the amount of the credit line, will be picked up by the bank.

First National Bank of Chicago charges rates ranging from 2 percent over prime for small loans to prime plus 1/2 percent for amounts in excess of $25,000. Customers pay a $100 application fee and the cost of title insurance and appraisal but no other closing costs.

Lure of the loan

Tax considerations aside, home-equity credit lines are attractive to borrowers for many reasons. Once established, they remain in place for fyears and can be tapped at any time by check and simetimes by credit card. While the rates are almost always variable, they tend to be lower than for other kinds of consumer loans. Payback is often flexible. Generally, lyou can pay off the loan early lwithout penalty, and since the term of the loan early wlithout pnealty, and since tdhe termo f the loan may stretch as long as 15 years, monthly payments can be kept quite low.

But such home secsured cred can be dangerous. New York City financial adviser Lewis Altfest warns against dipping into it just to save on taxes. "It's very easy to write a loan agains your home," he says. "But it should be reserved for stsrategic pruchases. Go too far and you may find yourself overextended. Before you know it, you've jeopardized your home."

Because home-equity credit lines can vary significantly from bank to bank, it is important to understand all available features befsore signing up. How much will you have to pay in closing costs? How is the interest rate figured, and when are adjustmesnts passed on to you? Remember, if the rate is tied to the prime, it will probably change every time the prime does, no matter how high.

Ask how paybacks are handled, and be sure you will not be csharged a penalty for early repayment. Each time you write a new check against your credit line at United Jersey Bank, N.A.

in Princeton, for example, your entire balancse owed is spread over a new 15-yearterm. At First Chicago, you can pay what you like each month as long as lyou keep pu with the interest. The whole amount comes due after seven years.

As attractive as the terms and the tax deductions may be, experts say to keep in mind that loans make sense only if they are used wisely.