In times like these, it's hard for homeowners not to smile.

Prices in many housing markets appreciated rapidly in 1998, and they seem poised for another strong year in 1999, if consumer confidence, employment and stock prices remain high. The surge has left many owners with a substantial amount of home equity to borrow against to consolidate debt and tap for repairs and renovations.

Yet some experts urge caution even as the economy continues to do well. Borrowing too much equity can put a homeowner at risk if the real estate market collapses.

"If values are appreciating, that's going to unlock, for a lot of folks, more home equity availability. They would typically be able to qualify, possibly for some higher loan amounts," says Clarke Starnes, a senior vice president and risk manager at BB&T Corp.'s direct retail lending division. The Winston-Salem, N.C.-based bank has branches in the Carolinas and a handful of other mid-Atlantic states.

"But I think borrowers, again, need to be prudent about using home equity wisely and not just for every small financing need. They need to remember their home is on the line."

Average prices higher
Three national surveys agree that housing prices are appreciating at a healthy clip. The National Association of Realtors says the national median price for existing, single-family homes rose 5.2 percent to $130,600 in 1998. (The median is a midpoint -- half the homes sold for more, half for less). Chicago Title Corp., which polls home buyers in major metropolitan markets, found the average price of all homes jumped 8.2 percent to $208,000. And the Commerce Department's Bureau of the Census reports the average price of a new home rose 3.1 percent, to $181,600.

Any way you slice it, however, it was a good year for people who needed to borrow against their homes. If a house that was worth $100,000 one year rises in value to $110,000 the next, that makes the additional $10,000 available in equity to the homeowner, barring any unusual circumstances.

"It clearly gives us a huge upside opportunity for higher dollar values," says David Heffner, sales manager for Midwest consumer lending at LaSalle Bank. The Chicago company is a subsidiary of ABN AMRO Bank NV of the Netherlands.

"Customers will be qualified to get the loans."

As a result, more borrowers can consolidate high-rate credit card debt onto lower-rate lines of credit, which may also feature tax-deductible interest.

"That would allow folks, if they prudently manage that kind of loan, to possibly reorganize their finances and restructure higher-rate debt with more flexible borrowing terms and interest rates," Starnes says. "A lot of times, it will free up cash for their monthly budget."

From jumbo to conventional
Home equity loans can help in other ways, lenders add. Consider higher-end home buyers, who often have to get "jumbo" mortgages carrying higher interest rates than conventional loans. Buyers can get around those higher rates by putting down 10 percent, then taking out a 10 percent home equity loan, through a so-called "80-10-10" loan.

G. Richard Bright, senior vice president of the home equity lending division at Countrywide Credit Industries Inc., explains the process this way: Say somebody wants to buy a $300,000 home today with 10 percent, or $30,000, down. In most cases, the purchase would have to be financed with a jumbo first mortgage because loans for more than $240,000 fall into that category in 1999. On top of the rate premium, the borrower would have to pay private mortgage insurance, or PMI, on the loan because it would be made at less than 20 percent loan-to-value.

With an 80-10-10 loan -- in which people get an 80 percent loan-to-value first mortgage and a 10 percent home equity loan -- both the PMI and the rate disadvantage could be wiped out. The person would get a $30,000 home equity loan on top of the $30,000 down payment, and that would reduce the first mortgage to a "conventional" $240,000.

"That's something that we see happen a lot" at Calabasas, Calif.-based Countrywide, Bright says. "People actually buy their first mortgage down to a conforming loan limit by filling in the gaps with a second mortgage."

Equity loans also can numb some of the pain potential buyers feel when a surge in values prices them out of the housing market. That's because the equity in current homes tends to increase as well, and homeowners can tap that to improve or remodel to the point where their properties look new anyway.

"Rapidly increasing home prices may prevent them from buying a new home, but afford them the opportunity to add on to their current home," Bright says.

Handle home equity with care
So with all of these benefits, now is the time to step out and get a loan, right? Maybe, but not without good reason and a healthy dose of caution, experts say.

"It's always good to know that you have that security of higher value in that home," says Jonathan Garcia, housing coordinator at the Consumer Credit Counseling Service of Los Angeles. "But as one looks into utilizing the equity in their home, one needs to look at the possibility that the house could decrease in value."

When that happens, an overextended borrower can end up with debt that exceeds the value of the home it's secured against. People caught in this predicament can't sell their homes in most instances unless they can come up with the difference between the amount owed and the sale price at closing. The risk becomes worse if the homeowner has borrowed more than the home is worth. In today's rapidly appreciating housing market, some companies are willing to loan 125 percent of a home's value.

"I think the biggest fear that we have when we see real steep appreciation is that when you're in a volatile market, what goes up can come down," LaSalle's Heffner says.

Borrowers can stay out of trouble by limiting the amount of debt they're willing to accept. If taking a Caribbean vacation means taking out a high loan-to-value mortgage, experts say it's better to stay home.

Lenders' actions restricted
Still, most borrowers need not worry that their lines of credit will evaporate if home values reverse course and start falling. While lending contracts typically allow banks to block future advances or close outstanding lines when customers default on their payments, they don't let companies call in loans on account of falling property prices, experts say.

"There are some restrictions, some regulatory restrictions, on when lenders can block advances or terminate a line of credit or call the loan due," says Starnes of BB&T. "You can't always do that even if valuations on the property fall. It's tricky at best."

The only exceptions would be in extreme cases, lenders add. If a natural disaster leveled a region, for example, companies probably could freeze any outstanding lines of credit there until the value of the underlying properties could be reassessed.

"If we've made a loan to $100,000 on a $100,000 property and all of a sudden that property is worth $80,000, I'd probably be a little hard-pressed to say how we would get out of that commitment and I don't think I'd want to get out of that commitment," says Countrywide's Bright. "That's the risk of this business."

To date, however, that risk hasn't kept companies from climbing all over each other to get home equity business. Rock Financial Corp. Chief Executive Officer Daniel Gilbert plans to expand his equity lending operation substantially in the near future, and he says he isn't worried about where home values are headed.

"Overall, home equity lending has been a profitable, safe sector for banks and home mortgage companies over the last couple decades," says the Bingham Farms, Mich.-based executive. "With prudent underwriting, when you have single-family, owner-occupied properties, I think it's a pretty safe business to be in."

-- Posted: March 10, 1999