Bills.com Offers Homeowners Litmus Test for Equity Loans

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List examines common reasons, risks of home equity borrowing

In the past decade, millions of homeowners financed their lifestyles with home equity loans -- and the nation saw the fallout in the mortgage market crisis. Bills.com president Ethan Ewing offers consumers who are thinking about applying for home equity financing six ways to spend the cash -- and advice on whether the spending is savvy or silly.

"Today, fewer applications for home equity loans or lines of credit are being approved -- reflecting the need for cautious home equity borrowing," Ewing said. "Most loans do not exceed 85 percent of the value of a home for a first mortgage and a home equity loan combined. More lenders are requiring strong credit scores and high amounts of equity for any real estate loan. Still, if it is for a good reason, a home equity loan may make sense."

Why the worry? For one thing, lenders are at risk, Ewing said. More than one-third of homeowners have home equity lines of credit, with an average balance of more than $48,000. Last year, borrowers opened more than $5 billion in new home equity lines -- at the same time that home prices have fallen 14 percent nationwide. In response, lenders have tightened home equity requirements.

Here are the top reasons people get home equity loans -- and Bills.com's suggestions of what to think about first:

1) Pay off other debt. Some people want a home equity loan to pay other debt, such as credit cards or a car loan. Paying debt with a home equity loan can have tax benefits, and a single payment is more convenient. Silly or sensible? Sensible: If you cut up your credit cards after they are paid off. Silly: If you pay off the credit card or other debt, and then go on a spending spree, sending debt back up.

2) Home renovations. A home equity loan can help use a home's value to improve the home. Credit can fund major home projects -- like new windows, a new roof or a remodel -- over a long period of time. Silly or sensible? Sensible: If you have significant equity and strong expectations of recouping most of the project's value.

3) Vacation. Ads for home equity loans often mention taking a dream vacation, but it's far from relaxing to pay off a two-week vacation for years to come. Silly or sensible? Silly: Save for a dream trip before taking it.

4) Education. Some people borrow to send a child to college or change careers themselves. Silly or sensible? Sensible: If the home is mostly paid off and you or your child will gain from the opportunities education provides.

5) Emergency fund. Many homeowners want a home equity line "just in case." They do not draw funds until they are out of work or face a similar crisis. Silly or sensible? It is a calculated risk. In a short-term job crunch, borrowing could provide emergency cash at a time when you could not obtain additional credit. On the other hand, borrowing puts homeowners at risk for losing their home in addition to their job. "Should you choose this option, do not take out cash to stash -- you'll pay interest on the balance," Ewing cautioned. "Instead, plan to withdraw funds when they are needed."

6) Everyday expenses. Some people take money from their home equity to pay everyday bills like fuel and groceries. Silly or sensible? Very silly: If you cannot afford your lifestyle, re-evaluate. It may even be better to sell your home than to risk losing it and destroying your credit.

"Home equity loans can be a useful tool, but they also can put a dent in your financial well-being," Ewing said. "Think twice before choosing to borrow -- and make sure to borrow sensibly if you do so."

Based in San Mateo, Calif., Bills.com (http://www.bills.com) is a free one-stop portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. As the online portal to Freedom Financial Network, LLC, the company has served more than 40,000 customers nationwide since 2002 while managing more than $1 billion in consumer debt. Its RSS feed is available at http://www.bills.com/news_releases/.

In 2008, Entrepreneur Magazine ranked Bills.com as the No. 3 fastest-growing U.S. company on its Hot 100 list. Bills.com also was named a finalist as "most innovative company" in the American Business Awards in 2008. Company co-founders and co-CEOs Andrew Housser and Brad Stroh were named to the Silicon Valley/San Jose Business Journal's "40 Under 40" list in 2008, and as Northern California finalists in Ernst & Young's 2008 Entrepreneur of the Year Awards.

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Aimee Bennett

Ethan Ewing
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