Equity loans vary in terms, so shop around

March 15, 1992|By James M. Woodard | James M. Woodard,Copley News Service

The temptation to obtain "quick and easy money" from a home equity loan is particularly strong during these days of continuing recession. But caution and careful investigation should precede a decision to sign those mortgage papers.

The current wave of equity loan applications is generating a lot of profit for mortgage companies. But it's not always in the long-term best interest of the borrower.

I recently received loan-promotion letters from two mortgage companies. One said I could obtain cash from the equity in my home to be used for any reason. And it didn't even matter whether I had been turned down by banks, my credit record is the pits or I'd been in bankruptcy. It didn't even matter if I'm self-employed or retired.

The other letter offered me from $5,000 to $500,000 in a home equity loan with no upfront fees. "You can have your money in as little as 10 working days from application," the letter states.

I called the first company to see if they, too, would send equity-secured money with no upfront fees. "Certainly we will," the happy voice responded. "Of course, we'll add those costs -- like a $45 credit report and $300 appraisal fee -- to your loan amount."

In other words, "no upfront fees" means you pay the sum total of those fees plus interest with your monthly payments, and with that big balloon payment at the end of the loan term.

To protect themselves in today's volatile real estate market, most home mortgage lenders now limit their equity loans to 65 percent of the property's current market value. Interest rates often change twice every day. And loan fee "points" range from zero to 20. This is a charge for processing a new loan -- each point being 1 percent of the loan amount.

Being conservative and holding down the loan-to-value ratio on equity mortgage loans is a national trend, and a natural response to factors that have battered the mortgage industry in recent years.

One-third of the 550 banks recently surveyed by the American Bankers Association said the value of homes securing equity loans in their areas have fallen 10 percent. The real estate crunch has forced banks and other mortgage lenders to review their policies of accepting new loan applications.

There is now about $115 billion in current home equity credit lines nationwide. The appeal of borrowing against the equity in the family home is indeed very strong, especially when you consider those interest payments are tax deductible -- one of today's rare tax breaks.

If you want a home equity loan.

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