Newspaper article THE JOURNAL RECORD

Home-Equity Loans Remain Popular Innovation of '80S

Newspaper article THE JOURNAL RECORD

Home-Equity Loans Remain Popular Innovation of '80S

Article excerpt

NEW YORK - Among the many financial innovations of the 1980s, few have achieved as much broad popularity as the home-equity loan.

It isn't hard to understand why. Home-equity loans serve as a convenient way to tap one of the nation's greatest pools of wealth.

On top of that, changes in the laws have given them a special tax status. In contrast to most other types of consumer borrowing, interest paid on the typical home-equity loan remains fully deductible, within specified limits.

But with all their advantages, home-equity loans also carry with them more potential risks and drawbacks than many people realize, financial advisers say.

As Albert Ellentuck at the accounting firm of Laventhol & Horwath puts it: ``Home-equity loan agreements, like cigarette packages, should carry a consumer warning in large type - `Caution! This loan could be hazardous to your financial health.' ''

The biggest pitfall in home-equity borrowing - the risk of losing your house if you can't keep up with payments - has been widely publicized, and deservedly so.

This point alone makes a powerful case against using home-equity credit for any frivolous or short-term purpose, such as a vacation or a shopping spree.

Ideally, the money borrowed should finance an asset with a value at least as great as the total cost of the loan, and expected to last at least as long as the term of the loan.

The most obvious example of this kind of asset would be improvements to the property itself.

``Say you take out a 10-year home equity loan to finance a new car,'' Ellentuck observed.

``The car is gone long before you've paid off your loan. …

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