A survey that reveals most homeowners have never used their home equity is being used to suggest they should, but unfortunately skips advice to the contrary.

On the positive side, the study also further helps further dispel fears about a much-discussed real estate "market bubble."

Parsippany, NJ-based Champion Mortgage recently found that 58 percent of homeowners have never had a home equity loan or credit line and have never considered applying for one.

Most, 56 percent, also said that they would not consider using the equity in their homes to consolidate high levels of debt.

"This finding suggests that even after a history-making mortgage boom over the last four years, there is a substantial opportunity to educate consumers on the merits of using the equity of their home," said economic consultant John M. Urbanchuk, a director with LECG, a leading expert services group.

True, but it's also an opportunity to educate consumers on the merits of not using their equity, but to instead plan for financial events that could otherwise force them to tap equity.

Home equity is the difference between your mortgage balance and the value of your home.

When you buy a home with a down payment of, say 20 percent, you have a 20 percent equity stake in your home. Over time, mortgage payments and appreciation can give you a larger equity stake. Likewise, depreciation can reduce your stake.

Lenders allow you to borrow money against that equity, provided you qualify with good credit and adequate income.

In the past, lenders preferred that you have an outstanding home loan balance that equals no more than 80 percent of the value of your home, but today you can obtain loans totaling as much as 125 percent or more of the value of your home.

Financial counseling

Experts, including Paul Richard, executive director of the San Diego-based Institute of Consumer Financial Education (ICFE) says too often, consumers with high credit card and other debts turn to their fast-growing equity as an easy way out, but without the resolve to quit using credit cards. That can send them into a downward spiral of indebtedness and cost them their home.

Equity loan interest rates are almost always cheaper than bank card and retail card credit and that will save you money when you use equity loans to pay off or consolidate more expensive debt. With the lower interest rate and flexible terms, equity loans also come with what's likely a lower monthly payment than the combined monthly payments of all the debts you consolidate. Also, because an equity loan is secured by real estate, the interest and some related costs are tax-deductible -- provided your total mortgage debt does not exceed 100 percent of the value of your primary residence.

However, any loan tied to your home's equity is by nature an equity-depleting loan and you don't have an unlimited amount of equity to bank on.

Also, those who typically find themselves facing credit card debt meltdown aren't likely to suddenly stop the habit just because they have equity to burn. What they may need instead is financial counseling to just-say-no to their spending addiction.

Zero-interest credit cards, zero equity use

Another under-reported option to paying off credit cards is zero-interest-rate credit card offers. While you must have pristine credit and you won't get the tax advantages of an equity loan, you can often transfer existing credit card balances to credit cards that don't charge interest for six months to a year. If, during that time, you close out the old accounts, pay off the balance on the zero-interest card and don't ring up any more charges, your equity remains intact and you'll save thousands of dollars on credit card interest.

The most conservative financial experts advise never to use your equity, but to pay off your mortgage so that when you retire on a fixed income you'll be home free.

Most homeowners seem to agree. Seventy-three percent of the homeowners surveyed in Champion's study indicated that a slight rise in interest rates would have no impact on their willingness to apply for new home equity loans or lines of credit. Twenty-four percent said that an interest rate increase would make them less likely to apply, according to Champion's survey.

Financial planners, including Eric Tyson, author of "Dummies" financial guides, say before you purchased your home, you should have squirreled away an emergency savings fund that went untouched for the home purchase and is large enough to cover your monthly debts for a six-month or longer period.

Such a fund would delay or limit the need to borrow should financial hardship hit.

Without the fund, you could be forced to tap your equity for emergencies or other unforeseen events that reduce your income or place added demands on your wages -- job loss, births, illness, injury, death and others.

Wise equity use

Other experts say if you must use your equity, reinvest it. Use it for capital improvements and investments that provide an equal or better return on your money than the cost of the loan. Certain home improvements, education for the kids and new business financing are relatively better uses of equity than buying cars and boats, debt consolidation and vacations.

Indeed Champion's survey found that among homeowners who have either credit lines or loans or considered applying for them, 57 percent use the money for home improvement. The survey also said 29 percent use equity to consolidate debt and 25 percent used it to pay off credit cards.

If you haven't managed to build an emergency nest egg during hard economic times, an equity line of credit -- obtained but not used unless you actually become unemployed for an extended period -- can help you sleep at night if you have nightmares about a job loss or a wage cut.

"Home equity credit lines or loans may be an effective credit management tool that can certainly help many homeowners who haven't yet considered them," Urbanchuk added.

Champion's study also can be viewed as evidence against severe fallout from the purported real estate market bubble.

Some economic forecasters believe too many homeowners are over extended with first and second mortgages and won't be able to weather bad economic times if the much ballyhooed real estate market bubble bursts and home values plummet.

Out-of-work homeowners with no more equity to tap because of depreciated values could then lose their homes -- or so the theory goes.

The survey, like other recent studies, reveals most homeowners are wise about equity use and help put that theory to rest.

Published: July 20, 2004

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.