If you have a pulse and a mail drop, you've probably received the hard sell on the home equity lines of credit lenders started offering Wednesday.
"You just got a new opportunity to improve your lifestyle from the state of Texas!" Houston-based Coastal Banc crows in a flier mailed to prospects -- although their mailing list needs some work; one was sent to a 13-year-old North Austin boy.
Lenders' enthusiasm is understandable. Rising interest rates are slowing the growth of traditional home equity loans, but lines of credit currently have a much lower rate. Lenders are offering lines of credit at about 4.5 percent, compared with 6.25 percent on home equity loans...
Avoid converting UNSECURED credit cards to SECURED home morgage debt.
This is especially true in states with good homestead exemptions for bankruptcy.
By Robert Elder Jr.
AMERICAN-STATESMAN STAFF
Sunday, October 5, 2003
If you have a pulse and a mail drop, you've probably received the hard sell on the home equity lines of credit lenders started offering Wednesday.
"You just got a new opportunity to improve your lifestyle from the state of Texas!" Houston-based Coastal Banc crows in a flier mailed to prospects -- although their mailing list needs some work; one was sent to a 13-year-old North Austin boy.
Lenders' enthusiasm is understandable. Rising interest rates are slowing the growth of traditional home equity loans, but lines of credit currently have a much lower rate. Lenders are offering lines of credit at about 4.5 percent, compared with 6.25 percent on home equity loans.
In the rest of the country, lines of credit are booming, thanks to those low interest rates. The lower rate makes a line of credit attractive for just about anything lenders are touting: paying off high-interest credit cards, buying a car, paying for college, taking a vacation.
Texas voters Sept. 13 overwhelmingly approved a constitutional amendment that would allow home equity lines of credit. (Voters also approved refinancing a home equity loan with a reverse mortgage.)
Before you apply for a line of credit, however, there are a number of danger spots to consider in the current law and, possibly, in the future, because Texas regulatory agencies are charged with interpreting key provisions of the law. Here are seven things to consider:
1. Your house is on the line
Lenders are dressing up lines of credit with nifty marketing, but a line of credit is the same as a home equity loan: Fail to make one payment, and the lender can foreclose.
Foreclosures are already soaring throughout Texas. The number of properties posted for foreclosure in Central Texas is at the highest level since the bust of the 1980s.
And home equity loan defaults are showing up in the foreclosure postings. In Travis County, for example, 13 of the 359 properties posted for foreclosure this month were foreclosed because of defaulted home equity loans.
"It's about two things: jobs and extremely high credit card debt," says George Roddy Sr., president of Foreclosure Listing Service, an Addison company that tracks foreclosures in several Texas counties.
2. That low rate isn't locked in
At an annual percentage rate of less than 5 percent, lines of credit are a better deal than 30-year mortgage and home equity loan rates. But because lines of credit are open-ended, generally five or 10 years, the interest rate fluctuates.
Lines of credit are tied to the prime interest rate. And the prime rate is affected by the Federal Reserve's decision whether to raise or lower rates for short-term borrowing. Right now, the Federal Reserve says it is keeping short-term rates low to boost the economy.
But if the economy continues to gather steam, rates would rise -- and so would your payments.
By contrast, home mortgage loan rates move in tandem with long-term interest rates, in particular the 10-year U.S. Treasury bond rate.
The rate for a 30-year fixed mortgage has been hovering under 6 percent lately.
3. Better deals found on some purchases
Lenders advertise home equity lines of credit as a way to tap your home's equity to buy such things as a car or boat. But similar or better rates are available for these types of purchases -- and, unlike lines of credit, the rates are fixed.
Capitol Credit Union, for instance, is offering rates of about 5 percent for used-car loans to members with excellent credit. For new cars, some dealers are offering rates from less than 1 percent to 4 percent.
One factor that favors a line of credit: The interest on these loans is tax-deductible, which isn't true of car and other consumer loans.
4. Take extra care with closing costs
They're capped at 3 percent of the loan amount, but that's not a real cap; costs classified as "interest" aren't included.
What constitutes interest? Under Texas law, discount points do -- and possibly other costs as well, depending on how the law is interpreted.
At the start, competition for the expected flood of applications will keep costs, and interest rates, at rock-bottom levels. Many lenders won't be charging any closing costs. Bank of America is one.
"You pay nothing except the interest when you draw on your line of credit," says Paul Enos, consumer real estate sales manager for Bank of America in Austin.
San Antonio-based Frost Bank is among the lenders drawing customers with an introductory offer. Frost, a division of Cullen/Frost Bankers Inc., is offering lines of credit right at the prime rate for six months.
The prime rate is currently 4 percent; Frost will adjust the rate to the new prime each month until the seventh month, when the rate will move to a half-point over prime.
5. Regulations, terms are not set in stone
With lines of credit now enshrined in the Texas Constitution, you'd think the regulations and terms would be final. They're not; the Legislature authorized the Finance Commission and Credit Union Commission to interpret the law.
Even as lenders start processing loans, issues remain unresolved. For instance, lenders are required to provide borrowers with the final, itemized list of closing costs 24 hours ahead of the closing. But there's a loophole: The estimate can be altered if a "bona fide emergency" exists.
State regulators will determine what constitutes an emergency. An early draft from regulators says lenders will be able to increase closing costs without 24 hours' notice if the amount is less than $100.
If enacted, the provision "will allow lenders to ignore the requirement that they get the actual fees to you the day before closing," says Robert Doggett, a housing lawyer with Texas Rural Legal Aid in Austin.
There's also a question about the law's requirement that repayments start within 60 days of closing, says Genny Rakowitz, an executive vice president at Frost.
Lines of credit don't require a borrower to draw money in the first 60 days. So does the law require a lender to draw money in 60 days so that repayment can begin?
"Our interpretation is, if you don't owe anything, you don't have a payment to make," Rakowitz says.
6. Document lenders' suspected mistakes
Lenders have 60 days to fix a violation of the law -- such as charging more than the agreed-upon interest rate, or excessive fees-- but the clock doesn't start ticking until you notify the lender in writing.
By contrast, Texas homeowners have only 20 days to fix problems with their mortgage loan before a lender can declare it in default and accelerate the payments.
7. Beware the pitfalls of `subprime' lending
"Subprime" is high-cost lending, often to homeowners with less than stellar credit. A Consumers Union study last year showed that the Austin subprime market is rife with complaints of excessive costs and confusing loan documents.
One problem, says Consumers Union senior attorney Rob Schneider, is that subprime lenders are improperly disguising fees as discount points, which aren't required to be included in the 3 percent cap on costs.
Many borrowers, he said, are paying discount points in exchange for lower rates that lenders promise but don't deliver.
The same problems in the subprime home equity market are also potential traps for borrowers looking to establish a home equity line of credit.
relder@statesman.com; 445-36711
The article is rather long. That's why you have the option
Excerpted - click for full article ^
You are wrong.
I just had to take out a line of credit on my home a couple months ago. My central air/heat pump of 20+ years broke and could not be fixed. I didn't have $6000 laying around and knew that winter was quickly approaching.
Should have I have let my family freeze?
Besides, why let all that money in your home sit there and waste away when you could use it if you use it responsibly?
I would NEVER take a vacation or buy a seadoo or motorcycle with a home equity line of credit however I WOULD put the money back into my home to increase its value. In that case it is a 1 for 1 expenditure and investment.
Sorry lweislynn.
I meant that last post for the others who were blasting lines of credit not you.
Until bush stops american jobs being replaced with cheap communist chinese laborers, do not take out mortages.
How very DNC of you to advise such nonsense. Your hatred of Bush colors your advice adversely.
Thank you for posting the full article. Some folks are just lazy I guess.