'Free' credit may have strings attached

On Money

September 24, 1995|By Susan Bondy | Susan Bondy,Creator's Syndicate

Many banks advertise "free" home-equity credit. Although some offers are legitimate, others may have hidden fees and extra charges lurking behind that claim. Here are some areas the homeowner should question when shopping for a home equity loan or line of credit:

* Fees: What exactly is free? If obtaining a home-equity loan is free, is there a charge to apply for the line of credit? If a bank waives its application fee, do you still have to pay for points, origination or discount fees, the appraisal, the title search and the title recording? Is there an annual "administrative" fee once the loan is approved?

* Minimums: Are there any minimum requirements? You may only want to borrow a small amount of money, but the bank may require you to qualify for more loan than you really need. You may not be able to qualify if you have a small amount of equity in your home, putting you out of the running for the "free" promotion.

* Rates and terms: What interest rate will you be charged? Not only can a bank offer a different rate for a home equity loan than for a line of credit -- its advertised rates may only apply to "jumbo" loans geared to larger borrowers. Unless you borrow $50,000 or more, you might end up paying the higher rate. You might even be charged a higher percentage rate once you've paid back part of your loan.

Note: Although terminology varies from lender to lender, in most cases, a home-equity loan is for a lump sum, which is repaid through monthly installments, often over seven years, with a final balloon payment of the remaining principal. An equity line of credit is a revolving loan, which may be accessed at any time but often must be paid back within a prescribed period of time such as five years.

* Loan amounts: How much can you borrow? The way to calculate the maximum amount you can get on a home-equity loan or line of credit is: Take 75 percent (or 80 percent if the lender will go that high) of your home's appraised value, and then subtract what you owe on your first mortgage.

For example, if your home was recently appraised at $100,000 and the outstanding mortgage balance is $60,000, you can borrow an additional $15,000 (75 percent of the $100,000 current value is $75,000, minus the $60,000 first mortgage, which leaves $15,000).

By the way, just as you would refinance a high fixed-rate mortgage, you should also consider refinancing a fixed-rate home-equity loan. Of course, a variable-rate home-equity loan or line of credit would adjust itself to today's rates.

Although home-equity loans should not be used frivolously on risky investments or luxury items, they do provide homeowners a cheap way to remodel their houses or pay off expensive taxable loans, such as unpaid credit-card balances or car loans. The current rates are still very low, and the interest is generally tax-deductible.

Q: My mother recently passed away, and I have no idea what assets she had or how to find them. Is there anything I can do to locate her jewelry, stocks and bonds, etc.? I don't even know if she had an insurance policy. My personal grief is getting in the way of my even thinking straight.

A: There's a lot you can do, but it will take many phone calls, hours of searching, a lot of footwork and a lot of patience.

Here are some suggestions on ways to proceed:

* Search the house for all the papers you can find. Gather everything in one place.

* Go through those papers with a fine-tooth comb. Look for bank statements, brokerage and insurance statements, interest payments, tax returns, professional bills, etc. Then, play detective. If you find checking-account statements from a particular bank, call that bank and ask if there are other accounts: savings accounts, IRAs, CDs or perhaps even a safety deposit box. In addition to securities, safety deposit boxes often contain important papers such as the deed to the house, a will, birth certificates and marriage licenses.

* Tax returns can also provide many clues. Was there an accountant or a tax-return preparer involved? If so, his or her name will appear on the bottom of the form. This accountant may have additional information, such as brokerage statements and records of dividends, interest or other sources of income.

* If you locate a broker or brokerage firm through which your mother transacted, ask for copies of past statements. Those assets that were kept at the brokerage firm can be immediately identified from the latest statement. But only by going back over the historical statements can you discover the assets whose certificates were registered directly to your mother.

* If your mother was employed, contact her employer (if retired, her previous employers) to find out about any insurance policies, annuities or other benefits which may be due to you.

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