WHAT MAY be the most significant innovation in the American home-mortgage field in more than two decades officially hit the market last week.
It's called the "home-asset management account." It grafts a growing equity line of credit onto a standard home mortgage, and essentially makes tax-deductible home equity the centerpiece of a borrower's personal financial affairs. It turns your house into a bank that's always open - if you choose to use it.
Here's how it works. You apply for a home-asset management account instead of a traditional mortgage. The account consists of:
A first mortgage up to $750,000. The rate on the loan is the same as the prevailing rate in the traditional mortgage marketplace.
An initial home-equity line of credit equal to all or most of your initial equity or down payment. The credit line comes automatically and need not be applied for separately. To activate the credit line, you have multiple options: a set of checks, a plastic debit card usable at most ATMs, a toll-free access phone number, or a Web site. You can also walk into a retail branch office of the lender and get cash on the spot. There is no requirement that the credit line ever be activated or drawn down.
Every quarter you receive an "account review" statement that tells you how much your available equity line has increased because of principal paid off on your primary mortgage, plus a summary of credit line funds you've already drawn down.
Once a year, the quarterly statement also reports the estimated growth in your home's market value. The estimate is based on a proprietary statistical model that analyzes resale price patterns in your area. The growth in your real estate equity is added automatically onto your available credit line, unless you request that it not be.
If your estimated home resale value increased by $20,000 during the last 12 months, for instance, that amount would be added to your credit line for use anytime during the coming year.
Credit-line balances carry a variable interest rate, competitive with prevailing home-equity loan rates elsewhere in the market. But the credit line can be switched to a fixed-rate equity loan, whenever you think rates are favorable to lock in.
In most cases, payments on all the combined first- and second-mortgage debts in the account are expected to be tax-deductible.
Consider this hypothetical example of how a home-asset management account might work. Say you buy a home for $200,000. You put down $20,000 and sign up for a home-asset management account. The $180,000 30-year first mortgage in the account carries a fixed rate of 6 percent. The initial equity line available to you - thanks to your solid credit history and high credit scores - is equal to your $20,000 equity investment.
Each quarter after closing, you receive account reviews showing the principal you've paid off on the first mortgage and the status of your equity credit line. Say you don't activate the credit line during the first year. Then you get your annual statement showing total principal paid off during the year, plus the result of the estimated revaluation of the house and the land. Your home is now valued at $215,000, says your lender, and your available credit line rises by $15,000, plus whatever principal amounts you've paid down.
Is this the home-financing concept of the future? Peter Wissinger, president and chief executive of Wells Fargo Home Mortgage, the firm that introduced it nationwide Wednesday, certainly hopes so. Other major lenders, including Countrywide Home Loans, are known to be working on their own versions of the plan for introduction within the coming months.
But the home-asset management account has some troubling aspects as well. It allows you to hock your home to the hilt, putting at risk the largest wealth-producing asset owned by most households. And by making it easier than ever to liquefy your home equity, it could encourage some homeowners to binge on spending, and lose their debt-laden properties if their incomes fall short.
Kenneth R. Harney is a syndicated columnist. His e-mail address is email@example.com. Send letters care of The Washington Post Writers Group, 1150 15th St. N.W., Washington 20071.