Washington -- If you're one of the estimated 8.2 million American homeowners who have both a regular first mortgage and a home equity line or second mortgage, welcome to the credit elite.
New national studies suggest you're different: Your house is worth more than the average homeowner's. You have above average income, excellent job stability, and you're highly likely to have completed college or gone to grad school.
If you're the average home equity line borrower, according to new data compiled by the Consumer Bankers Association, a national trade group, you're between 35 and 49, your house is worth about $156,000, you've owned it for nearly nine years, and you've been employed at the same company for over eight years. You earn about $56,000 a year.
Not surprisingly, therefore, you're a good bet to pay back your equity line without falling behind. Less than 1 percent of all home equity borrowers miss payments -- a far lower rate than other forms of consumer debt and many first mortgages. A minuscule 0.14 percent ever have to be foreclosed. Yet you pay the bank a profitable rate on your equity borrowings -- an average 1.7 percentage points above the prime rate, up from 1.59 percent just a year ago.
So no wonder all those banks and mortgage companies are flooding you with "tap-your-equity-now" pitches. You're gilt-edged.
What are you doing with your home equity line or second mortgage? The new Consumer Bankers study found that the biggest single use of home equity dollars in 1994 was debt consolidation. Fully 30 percent of credit lines and 43 percent of traditional second mortgages went to essentially rearrange -- and cut the monthly costs of -- existing charge accounts, education loans, car loans, and home mortgage debt.
Second most frequent use: financing home improvement projects, which accounted for between 22 percent and 24 percent of all equity loan activity last year.
In third place: auto purchases, a home equity expense category that barely existed before 1986, when Congress removed the tax deductibility of ordinary consumer loans. Why pay credit company rates in the mid-teens for a $15,000-to-$20,000 auto loan, homeowners in the '90s have decided, when I can tap my real estate equity at prime plus 1 and 3/4 percent, and write off the interest payments to boot?
One potentially ominous note that popped up in the study's data: In the event that interest rates in the overall economy rise rapidly some time in the future, the majority of home equity borrowers tied to monthly or other rate indexes could be in for nasty shocks.
That's because only 21 percent of lenders have put rate caps on their home equity lines, and just 30 percent on their second mortgages. Consumer-friendly annual caps to protect borrowers from rapid payment jumps are the rule, by contrast, on adjustable-rate first mortgages. Equity loan applicants might well shop around to find a peace-of-mind, rate cap deal, rather than one that leaves you naked in economic storms.