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The Down Side
Consider Home Equity Loans With Care

Interest rates as low as 4.5 percent, steady home-price appreciation, and easy access via credit card, telephone or cheque are luring an increasing number of Canadian consumers to take out home equity loans and credit lines. According to the U.S. Federal Reserve, the number of home equity credit lines surged 92 percent between 1997 and the third quarter of 2002, mainly because homeowners now view their properties as assets rather than debt. However, if interest rates rise, many of those same borrowers could find themselves strapped for cash and heading toward foreclosure.

Financial experts say that homeowners often make the mistake of using their home equity to pay off other debts without closing their credit-card accounts or changing their spending habits. Though the foreclosure rate on home equity lines is much less than the rate for conventional mortgages, the sluggish economy pushed foreclosure rates to an all-time high of 1.15 percent in the third quarter of 2002.

To avoid financial crisis, homeowners should carefully review the terms, conditions, annual percentage rate, and fees involved and consider a fixed-rate second mortgage as an alternative. Experts also caution against home equity loans or credit lines if more than 10 years is needed to repay the debt, especially since a decline in home values could leave the borrowers owing more than the residence is worth.