Home Equity

The soon-to-be bride had no choice.The balance on her dress was due, the caterer wanted his money and the DJ wasn't playing for free. Without the cash to pay upfront, she did what anyone might do -- she put it on plastic.A year after the wedding, Bridgette -- who asked that her last name not be used -- found herself with $12,000 in credit-card bills in addition to an $18,000 balance on a home-improvement loan. Wanting to consolidate her bills and decrease her monthly debt payments, Bridgette went to the bank and got a home-equity loan for $26,600.

Rising interest rates, reflecting worries about inflation, may force into action homeowners who have held off refinancing mortgages in hopes of catching the low point of the interest-rate cycle. One idea to consider is replacing a conventional mortgage with a fixed-rate home-equity loan. This could allow a borrower to lock in some of the best rates in two decades while saving a few thousand dollars in closing costs.xTC "It's a good way to trade in higher interest-rate debt for lower-cost debt with limited out-of-pocket expenses," said Keith Gumbinger of HSH Associates, a mortgage information service in Butler, N.J. The typical cost of refinancing a mortgage is about $3,500, Mr. Gumbinger said.

When it comes to mortgages these days, timing is everything. Mike, from the Frederick County community of Middletown, is in the process of selling one house and buying another and finds that rapidly changing market conditions have wrenched his financing plans. "With recent market conditions changing (my home sale price, stock market drops and interest rate hikes), I may need to take a $20,000 loan from my 401(k) to pay for closing costs on my new home," he writes in an e-mail. (He's already taken out a home-equity loan on his current townhouse to make the 10 percent down payment on his new home under construction.

Buying a new vehicle requires so many decisions. Sedan or coupe? Import or domestic? Luxury or economy? Once those questions are answered, the tough one comes: Should you take the cash rebate or the discount financing? If financing, should you go with a vehicle loan or use home equity? Weighing cash-back incentives vs. a low interest rate "When offered $1,000 or less in rebates, in most cases the factory-sponsored discount financing rate, whether zero, 1.9 percent or 2.9 percent, almost always is better than the rebate.

Jesse Jubray was ready when his company retrenched in June, but his financial preparations have earned him only breathing room so far. The computer technician tamed his credit cards with the help of Consumer Credit Counseling Service of Delaware Valley. He shifted to contracting work when he saw that companies were reluctant to add full-time employees. But he took out a new loan this year after failing to land a new assignment. His last job ended shortly before Christmas, and he has not pulled a paycheck since.

The Maryland Court of Appeals decision that state-chartered banking companies may not recover closing costs on home equity loans if a loan is retired within three years is quite stunning. For years state banks have required borrowers to repay appraisal and courthouse filing fees if they close an equity line or pay back a loan within three years. When banks extend home equity credit they incur $1,000 in costs usually paid by the borrower. They agree to waive the costs - and extend the loan closing-fee-free - if the borrower agrees to continue as a customer for three years.

IF CONGRESS wants evidence about how federal tax policy can transform consumer behavior, it need look no further than a forthcoming report on the current state of the American home equity loan.Whereas barely 30 years ago second mortgages were considered a backwater of consumer credit, aimed primarily at people who had no other way to raise cash, today they are a product for the creme de la creme: Home equity borrowers have higher incomes than the average American household, they pay much less for their credit than people who take out ordinary consumer loans, and they default on their obligations at a very low rate.

THE SAME banking industry that in recent years induced millions of Americans to become slaves to their credit cards, making it easy for working families to saddle themselves with crushing 18 percent debts that can take a lifetime to pay off, is now coming to their rescue.The home equity loan is so easy to get you can practically secure one by yelling out your window. In one recent week, my mailbox was for the first time stuffed with more offers begging me to apply for instant home equity loans than it was with new pitches to apply for credit cards at highly tempting and highly temporary "low annual rates" that go up to near loan-shark levels after six months or a year.

The number of U.S. households with home equity loans reached 9 million in 1997, according to a report released by the University of Michigan's Survey Research Center.The report, conducted from May to October 1997, found the percentage of homeowners with either a traditional home equity loan or a home equity line of credit was 13 percent, just two percentage points higher than the 11 percent of homeowners with home equity loans in 1988.But, with an increase in U.S. households and homeowners in the decade, the total number of home equity borrowers increased 38 percent, from 6.5 million in 1988 to 9 million in 1997.

Seeing faltering consumers, little job growth, tame inflation and election-year pressure, the Federal Reserve did the expected yesterday, cutting short-term interest rates for the third time in less than a year.Combined with last year's rate reductions and expected future ones, the move is expected to trim costs for adjustable-rate mortgages, home equity loans, credit cards and other consumer borrowing.The Fed lowered the key federal funds rate, which commercial banks charge each other for overnight loans, to 5.25 percent from 5.50 percent.

The letter starts off ordinarily enough, with a typical salutation in the form of "Dear Mr. Gilbert." But its next sentence is set off in boldface type as its own paragraph: "Congratulations, you are pre-approved for a Home Equity Line of Credit." It's not jarring to you, I suppose. You don't see a thing appalling or outrageous about this letter. Perhaps you, like the officer of the bank who signed the letter, believe that Mr. Gilbert is qualified for a home equity line of credit. Let me let you in on a little secret.

If you can, try to put credit lines in place before you need them Secure credit lines when you don't need them so they're there if you ever do. Christopher Parr counts this among his basic rules of financial planning: Put your credit lines in place when you don't need them. "When you do need them, you may have trouble qualifying," says Parr, a principal with Financial Advantage Inc. in Columbia. "If you've lost your job and want to set up a credit line, you don't have proof of income."

College tuition bills are coming due. And if you haven't secured your financing just yet, be prepared for a bigger challenge than usual. The lender you were counting on might no longer be making student loans. Or other glitches could pop up. Edamerica, for instance, says it's behind in loan disbursements to the University of Maryland, Baltimore County. Disbursements were due last week but now may be about a week late. Other schools in the area might also see delays. Blame the economy and credit crunch, says Edamerica.

Former Texas Sen. Phil Gramm got in trouble when he said Americans are mired not in an economic contraction but in a "mental recession." He soon had to step down as co-chairman of Sen. John McCain's campaign for committing the ultimate political sin: telling the truth about a misperception that happens to be very popular. Americans feel as though the economy is in a recession and want the government to do something about it. In reality, it is expanding. In the second quarter, it grew at a respectable inflation-adjusted rate of 1.9 percent, double the pace of the first quarter.

As a home owner, seller or buyer, what should you make of the Federal Reserve's latest bombshell report on Americans' home equity positions? Panic? Mild concern? No big deal? The dollar losses involved were huge and sobering. On a national basis, they document the personal financial impacts of declining home prices, especially in the frothiest boom markets of California, Florida, the Mid-Atlantic states and New England. But it's important to keep the Fed's numbers in perspective. They may not ring true in your own personal housing situation or neighborhood, or where you want to buy or sell.

I'll admit it: When home prices were soaring in my neighborhood, it made me feel really smart. Like so many millions of other homeowners, we concluded that we chose the right house in the right neighborhood at the right time. And as the years went by, and all of us on the block could count our home appreciation month by month, all this paper equity made us feel financially secure as in, "Now we know how we're going to pay our college tuition bills down the road." But as they say, easy come, easy go. Home prices in our neck of the woods have been falling just as they've been falling around the country.

Seniors don't have to look farther than the TV or their mailboxes to find somebody selling a way to dig out of trouble, or foreclosure, with a reverse mortgage. And the marketing is going to get more intense. Big players such as Quicken Loans are moving into reverse mortgages as more baby boomers turn 62 and qualify for these complex home loans. One service sells hot leads of seniors who are late with mortgage payments. So if you're a senior, brace yourself: Some lender will tell you that your retirement nest egg includes the nest itself.

Senate OKs measure on equity loans In a move that essentially reverses a ruling by the state's highest court, the Maryland Senate approved a bill yesterday to allow state-chartered banks to continue extending certain home equity loans. The bill passed on a 34-10 vote over the objections of some lawmakers who said it would give banks too much leeway with regulators. The bill also would limit lender liability if a court determines that certain costs are not allowed and that lender had previously obtained regulatory approval for passing on those costs.

The Maryland Senate gave preliminary approval yesterday to a bill that would allow state-chartered banks to continue to offer a type of home equity loan the state's highest court previously ruled was in violation of consumer protection laws. Sen. Thomas "Mac" Middleton, chairman of the Finance Committee, said that the court had erred in its ruling and that the legislature often steps in to clarify the law. The Senate might take a final vote on the bill this week; the House of Delegates unanimously approved similar legislation last week.

A key state lawmaker is working with the banking industry's trade group on legislation that would reverse a Maryland Court of Appeals decision prohibiting certain penalties for borrowers who pay off home equity loans early. The case involved a popular loan program at Provident Bank that enabled borrowers to tap into equity in their homes without paying closing costs as long as they kept the loan for at least two to three years. Maryland's highest court ruled late last year that recouping the closing costs if a consumer refinances or pays off the loan before then amounts to a "prepayment penalty" that's not allowed under state law. Banking industry officials say that without a guarantee that borrowers will pay interest on home equity loans for at least a few years, they can't afford to offer no-closing-cost products, making borrowing more expensive for consumers.