I received a letter to my newspaper column not long ago, asking "If I fall behind on payments on my equity loan, could they put a lien on my house?"

Oh, dear.

That reader evidently didn't realize that an equity loan "IS" a lien, a legal financial claim on the real estate. It's really a second mortgage.

Yes, mortgage interest is income-tax-deductible. Interest on car loans isn't. So sometimes homeowners will take out a second mortgage or home equity loan to buy a car. And if it's a 20-year loan, they'll still be paying on it long after the car has gone to that junkyard in the sky.

There are reasonable uses for home equity loans, among which, for example, I'd put college tuition. What you don't want to use one for is something short-term, like a Caribbean vacation. You'd still be paying for it years after it was over.

What's really dangerous, these days, is the 125-percent loan being offered in some areas. You can borrow more against your house than you could sell it for. Run into any unexpected difficulty, and ten to one you'll lose the property. What's more, t he IRS says that the value of your home is security for only part of that loan. You aren't supposed to deduct interest paid on the 25 percent you borrowed beyond what the house is worth.

So I worry about that lady who wanted to know, if she fell behind, could they put a lien on her house. She evidently thinks she can handle the payments as she would with a credit card -- let it go one month and pay extra interest. She has a mortgage there, and her home could be in danger if she falls behind in even one payment.

More Advice for Borrowers

Published: March 15, 1999

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