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Jewish World Review March 16, 2001 / 21 Adar, 5761

Real Estate Watch by Pamela Reeves

Pamela Reeves
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Consumer Reports


Home equity loans...delinquencies rise...rates flat

http://www.jewishworldreview.com -- WITH the scary turmoil in the stock market, odds are that the Federal Reserve will be reducing interest rates again. That would make home equity loans especially attractive if you're in need of a little cash about now.

Most home equity lines of credit are linked directly to the prime rate set by banks - whenever the Fed reduces its rates the prime immediately follows. The last round of cuts sent the prime rate to 8.5 percent and it could be reduced by as much as three-quarters of a point if economic analysts are right.

Here are several reasons to consider a home equity line:

- A possible layoff. The Financial Planning Association says it might be a good idea to get a line of credit while you still have a job because you won't qualify for one while you're out of work. "A home equity line of credit would likely be less expensive than a bank line of credit and you'll get tax deductions for the interest," the association says. "Just be sure you can keep up the monthly payments since you do put your home at risk."

- You owe a substantial amount on your income taxes or quarterly payments coming due next month and don't want to sell your battered stocks right now to raise cash. Look at the bright side: interest you pay on the borrowed money probably will be deductible while selling stocks is generally a taxable event. Also, your stocks can't recover once they're sold.

- You're drowning in debt and have vowed to reform. Putting credit-card debt on the house is risky if you're just going to go on a spending spree again. But one low-interest payment can be a lifesaver when you're in over your head.

- With spring coming you're bursting with ideas that will make the house so much more appealing. All you lack is the money. This is a satisfying way to spend a home equity loan because you can see the results every day and you've probably increased the value of the house, too.

Today, with the prime rate at 8.5 percent, $70,000 borrowed at prime would cost $689 a month. If the rate fell to 7.75 percent, the payment would be $658. With an interest-only option for several years, you would pay $452 a month.

A lot of people fell behind on mortgage payments in the final quarter last year, the Mortgage Bankers Association found. The delinquency rate rose half a point from the previous quarter to 4.54 percent, the highest rate since the fall of 1992.

"The increase in the delinquency rate is significant but not a surprise given the fourth-quarter economic slowdown," said Douglas Duncan, the association's chief economist. "And rising energy prices also cut into homeowners' disposable income and ability to pay."

The good news: The current flurry of refinancings could help a lot of people get back on their feet, Duncan said.

Waiting for the Fed to act before refinancing? Like just about everyone else, the National Association of Realtors expects a cut in interest rates. But, it says, those anticipated cuts already have been considered and factored in to mortgage rates.

"We anticipate further cuts by the Federal Reserve - in fact, the recent decline in mortgage interest rates results in part from lenders' anticipation of future reductions by the Fed, " said David Lereah, chief economist of the association.

He expects mortgage rates to remain around 7 percent or a little under for the rest of the year.

Factoids from the Mortgage Bankers Association:

- Americans keep $4 trillion in savings accounts.

- Investors hold $9 trillion in stocks and bonds (probably less this week).

- Seventy million homeowners have $5 trillion in equity in their houses.

Mortgage rates were basically unchanged this week (March 15), according to a survey by Freddie Mac. The national average for a 30-year mortgage declined to 6.96 percent from 6.97 percent. The average for a 15-year loan rose to 6.54 percent from 6.52 percent and the one-year adjustable was up to 6.32 percent from 6.29 percent. All these mortgage rates come with about one point, a fee that amounts to 1 percent of the loan.


Pamela Reeves writes this column weekly for Scripps Howard News Service. Comment by clicking here.


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