Banks eager to make home equity loans Homeowners using them to consolidate their debt

March 22, 1992|By John Schmeltzer | John Schmeltzer,Chicago Tribune

CHICAGO -- Walk by virtually any bank and at least one window display will be hawking that institution's version of the home equity loan.

If you don't like walking, you can wait for the Postal Service to arrive at your door with one of the more than dozen of preapproved lines of home equity credit in amounts of $5,000 and up.

It's hard to avoid the ads if you're a homeowner. Most financial institutions offer no fee applications and appraisals and promise quick approval if you qualify.

And because the interest paid on a home equity loan up to $100,000 is tax deductible, homeowners have flocked to lenders, even in these days of a poor economy, to consolidate their credit card, auto, personal, college tuition and other unsecured loans into tax deductible debts.

The latest gimmick, according to Frank Walter, president of Bank One, Chicago, is for homeowners with a 9 or 10 percent mortgage to pay off that mortgage with a home equity loan. The financing of the home is then held by the home equity lender while the homeowner waits for fixed-rate mortgages to drop to a level where it's financially rewarding to refinance with a new fixed-rate loan.

"They realize interest rates are low and realize they can borrow at one-half point over prime [on a home equity instrument]," said Mr. Walter. "They compare that with their 9 1/2 percent rate and realize they can save some money. Their thinking is they don't think [fixed mortgage] interest rates have hit bottom."

Banks and the few remaining savings and loans make no bones about their desire to push the home equity loans. They've proven themselves to be quite safe -- the default rate is virtually zero -- and they're very profitable at a time when the banking industry is under pressure to improve their bottom lines.

Home equity, experts say, is the difference between the fair market value, hence the need for an appraisal, of your home and the amount of first and second mortgages you owe on the property. A home worth $100,000 for which there is a $60,000 mortgage will have equity of $40,000 that can be tapped to consolidate the unsecured debt.

"The commentary we try to put out is it is a low-cost method of doing a lot of different types of financing," said Mr. Walter.

But Mr. Walter and other bankers say the loans aren't for everyone, and they strive to make sure that only those people who can most afford the home equity line of credit receive the financing.

Despite the ready amounts of cash that appear to be available, he says banks try to make certain that an applicant isn't getting into something he or she can't afford.

The most popular of the home equity instruments is a credit line loan in which a borrower is given a credit line, but the borrower doesn't need to use any of the amount and there is no interest charged until the money is actually borrowed.

Most lenders provide a checkbook, so borrowers can write themselves a loan whenever needed. The credit line is more flexible and better for most homeowners, bankers say.

But the home equity loan presents a significant risk to a homeowner borrowing funds to consolidate debt that they have run up on their credit cards and for the new car sitting in the driveway.

Homeowners are putting their houses at risk if they were to suddenly lose their job, according to Norman Chiodras, a financial planner with an office in Oak Brook, Ill.

Mr. Chiodras said he has even more problems with obtaining a home equity loan to pay off an existing mortgage in anticipation that mortgage interest rates will come down.

Noting that rates had risen during the last month, he said, "These people absolutely are gambling. They don't know if rates are going to come down."

He said they have given up a fixed-rate mortgage in the hope that during the next five years rates will drop low enough that they can secure a new fixed-rate mortgage.

"It's a gamble and I would rather see them refinance rather than take a home equity," he said.

He said he has advised people to secure home equity loans to pay off unsecured debts, such as car loans and credit card debt. But that's been when the clients have had $40,000 or more in the bank and can afford to pay off the home equity loan.

But bankers said the care they now exercise in granting the loans have significantly reduced the risk for both the bank and the borrower.

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