Can borrowers bring some shine into their financial lives by getting home equity loans or lines of credit? Or are they setting themselves up for tarnished credit ratings and the loss of their homes?

The answer depends on the borrower. Those who take the time to analyze their budgets and make sure they can afford to tap their equity can use the lower rates and tax-deductible interest home loans feature to improve their standing. But people who are too cavalier -- or who forget that lenders recoup any losses on these loans by foreclosing -- can end up on the street.

"If they need to eliminate unsecured debt, they need to pay college tuition or they need to buy an automobile, a home equity line is a great way to do that," says Rick Harper, director of housing education at the Consumer Credit Counseling Service of San Francisco. "The rates are lower and the term is longer, so from a cash flow standpoint, the individual can improve their position and save money.

Easy credit -- maybe too easy
But they're going to get in trouble, he adds, "if they're trying to eliminate unsecured debt and they haven't changed their personal situation to avoid the dangers." Thanks to tax law changes in the late 1980s, strong marketing pitches and interest rate cuts from lenders, home equity loans and lines of credit have become an increasingly popular way for consumers to borrow this decade. Homeowners have jumped at the opportunity to roll other obligations into debt consolidation equity loans, as well as tap their equity to pay college bills and improve their property.

In many cases, the move works out great for consumers for several reasons. Rates on equity loans are lower than rates on other loans, for one. The average variable-rate credit card had a rate of 15.88 percent in early December, while the average equity loan had a rate of 8.94 percent and the average line of credit had a rate of 8.13 percent. Because home equity loan interest is generally tax-deductible, consumers can save another percentage point or two, depending on their tax bracket..

"Usually, a home equity loan is less expensive, particularly when you consider the tax benefits, than credit card debt," says Nancy Langdon Jones, a certified financial planner in Upland, Calif. "It's also a lot easier to control the payment on a mortgage than it is to control the payment on a credit card because you tend to add to the credit card debt and not the mortgage debt."

A line of credit can come in handy during emergencies, too. By getting equity lines when things are going well, consumers can insure themselves against job losses, unexpected hospital bills or other pressing -- and expensive -- obligations.

"Today, the interest rates on those equity lines are down and a lot of my clients have been pulled through hard times by having them," Jones says.

Avoid frivolous purchases
Still, a home equity loan can tarnish a person's financial standing just as easily as it can improve it.

Consumers can get tripped up using their equity to pay for trivial or frivolous things, for instance. A television or vacation ends up costing much more than it should when the payments for it are stretched out over the full 10-, 15- or 20-year term most equity loans and lines of credit feature. Planners also point out that risking the house for a few extra months of Showtime doesn't make much sense. People should reserve equity borrowing for major purchases or items that will last for years.

The ease with which borrowers can get equity loans has some observers concerned too. Savvy consumers familiar with the risks of borrowing against their homes can benefit from quick credit-score driven approvals and electronic withdrawals via debit cards. But novice homeowners who don't know how to find a good deal can easily become overwhelmed.

Consider that today, they're likely to receive several solicitations for equity loans before their first mortgages are even three months old. Depending on the company pitch, these offers tout everything from "Same Day Approval By Phone" to "No Equity or Appraisal Required." One sent to a first-time home buyer in Florida with just two mortgage payments under his belt, for example, promises "Instant Cash For The Holidays" in bright red and green ink. The company -- located in California -- throws in a pair of clip-art wreaths for good measure.

'125s' can deep-six your finances
High loan-to-value home equity loans such as "125s" pose a danger as well. These loans raise a borrower's total debt level to 125 percent of the appraised value of the home, usually in combination with a first mortgage.

Experts worry that someone with a $100,000 home, an $80,000 first mortgage and a $45,000 equity loan could get stuck having to come up with $25,000 if some crisis such as a job loss forced a home sale before that second mortgage was paid down. If that money wasn't available, the borrower couldn't sell, and default on one or both of the loans might be the only available option.

After reading these tinsel and tarnish arguments laid out by planners, lenders and other experts, consumers should will see that home equity loans and lines of credit offer both a way out of and a way into financial trouble. Which path they choose is up to them.

"It is very, very easy," says Diana Kahn, a CFP who is president of The Financial Pharmacist Inc. in Miami. "You're constantly barraged with mailers about companies that are willing to take over debt in your home and write a new loan for you and consolidate this or consolidate that.

"But it's too easy" for some people, she adds. "Just because you have a certain amount of equity in your house doesn't mean you can afford to take on the extra debt. You have to be very familiar with what your monthly obligations are ... or you may find yourself in a situation where you can't afford to pay it."

-- Posted: Dec. 8, 1999