RICK ROTHACKER
Staff Writer
It's hard to open your mailbox or read the paper lately without seeing an advertisement for a home equity loan or line of credit.
With property values on the rise and mortgage refinancing waning, tapping home equity is the hot way for consumers to borrow money for remodeling their homes, consolidating debt or paying college tuition.
Even with interest rates on the rise, home equity borrowing is typically much cheaper than using a credit card. It also offers a tax deduction, just like a mortgage. Still, consumers need to be wary of potential pitfalls, experts say.
If you default on a home equity loan or line of credit, your home is at risk, unlike with credit card debt. Home equity lending also is the most likely to be abused by predatory lenders, consumer advocates say.
Consumers who take out these loans need to shop around for the best rates and check out all fees, experts say.
"Competition is very strong for these products," says Keith Gumbinger, vice president with HSH Associates, a Pompton Plains, N.J., financial publisher. "If you see a single ad, don't assume that is the price for (borrowing) money."
Fertile market
When long-term interest rates were at historic lows in 2003, homeowners rushed to refinance mortgages to lower payments and reap extra cash for renovations and other expenses. However, with the Federal Reserve raising interest rates six times since last summer, most homeowners already have locked in low rates.Now, with the mortgage business fading, banks see home equity lending as a fertile market for new customers or for building business with existing clients. In 2004, home equity loan originations increased 35 percent to $431 billion, according to SMR Research Corp., a Stratford, Conn., research firm.
With these loans, homeowners borrow against their home equity, the difference between a home's appraised value and the outstanding balance of the mortgage. There are two types of home equity loans: fixed-rate loans and lines of credit.
With a fixed-rate loan, homeowners get a one-time sum that is to be paid off during a set period. The interest rate doesn't change.
A line of credit works more like a credit card. Homeowners can borrow up to a certain limit, as needed. The rates can rise and fall, but are typically lower than fixed-rate loans. Both can offer a tax deduction on money borrowed up to $100,000.
A majority of borrowers use these loans for debt consolidation, according to Bankrate.com, a North Palm Beach, Fla., consumer finance Web site. They're also used for home improvements, medical expenses, education, emergencies and big purchases.
The biggest users of these loans are between age 35 and 49, according to Benchmark Consulting International in Atlanta. They have built equity in their homes and have established careers.
Consolidating debts in a home equity loan is appealing because the rates are much better than those of credit cards.
As of last week, the average rate nationally on a $50,000 fixed-rate home equity loan was 6.98 percent, while a $50,000 line of credit was even better at 5.71 percent, according to Bankrate.com. Compare that with 12.26 percent on a variable rate platinum credit card.
Still, a home equity loan isn't always the answer because it puts a borrowers' home on the line, cautions Greg McBride, a Bankrate.com financial analyst.
"That's not the kind of obligation that you walk away from," he said. "If you lack the confidence in your ability to make the payments, then don't do it."
Borrowers with spotty credit histories also need to be on the look out for predatory lending practices such as excessive fees and deceptive marketing practices, said Sharon Reuss of the Center for Responsible Lending in Durham. For example, aggressive advertising campaigns can sometimes persuade borrowers into taking out loans they can't pay back.
"Predatory lending is particularly devastating because (these) borrowers typically seek home equity loans at a time of great financial need," Reuss said.
Still, home equity loans and lines offer borrowers some of today's best available rates, said Ed Powell, chief consumer officer at Charlotte-based LendingTree LLC, which allows consumers to scout home equity offers through its Web site.
Now that most property owners have already refinanced mortgages, "home equity has become a much more viable option," said Powell, whose company is part of New York-based IAC/InterActiveCorp.
`I regrouped everything'
Last fall, Charlotte homeowner Mark Greenhalgh says he started looking for a home equity line because he wanted to do some renovations and consolidate some bills. The 34-year-old used LendingTree's Web site, and almost instantly had offers from multiple banks, he said.
Greenhalgh, who works in human resources, got a variable rate at prime minus a half point from Wachovia and paid less than $100 in closing costs. He has bought some furniture for his home and plans to fix a leak in his roof and remodel his master bathroom.
"I regrouped everything," he said. "It gives me more flexibility to get bills squared away and to do some home improvements."
With demand for home equity loans on the rise, banks, credit unions, credit card companies and other finance companies are offering a host of incentives and new products to lure customers.
Charlotte-based Bank of America Corp. last fall introduced a line of credit that eliminates all fees to customers who keep their accounts in good standing.
San Francisco-based Wells Fargo & Co. has a "SmartFit" loan that lets customers fix the rate for three, five or seven years, but later convert to a revolving line of credit.
Charlotte-based Wachovia Corp. plans to test an offer to provide free maid or pool service to homeowners for six months who take out home equity lines.
"We have to get a little creative," said Tom Medlin, vice president in the direct lending group at Wachovia. "There's a lot more competition."
Rick Rothacker: (704) 358-5235
Piggyback Loan
Home equity loans called piggyback loans can be used toward a down payment when you buy a house.
Typically, if you don't put down at least 20 percent toward the home price, borrowers have to pay private mortgage insurance (PMI), which is an extra fee to offset the potential cost of foreclosure for the lender.
To get around this, a home buyer can take out two loans -- one for 80 percent of the home price and one for the down payment. One example is an 80-10-10 arrangement in which the homebuyer gets a mortgage for 80 percent of the home, a piggyback loan for 10 percent and then puts down a 10 percent down payment.
Piggyback loans can also help reduce the size of a mortgage, keeping the loan beneath the threshold of a "jumbo" or "nonconforming" loan that charges higher rates.
"The reason to do it is to eliminate mortgage insurance or to get a conforming first loan," said Ed Powell, chief consumer officer at LendingTree.
Source: http://www.charlotte.com/mld/charlotte/business/10894463.htm?1c
Mon, Feb. 14, 2005
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