Here's some sensational advice for homeowners who may have recently obtained one of those highly advertised "home equity" loans, either from a finance company or one of the so-called small loan companies.
If you get a call from someone with an offer that sounds "too good to be true," you'd better check into it. It might really be true.
Calling it a "home equity loan" is one of the new, polite ways of describing an old-fashioned second mortgage on a private residence. Due to a combination of circumstances, loan company second mortgages have become the hottest item in consumer credit. They're also the most expensive, especially if you don't get (or don't listen to) one of those "too good to be true" offers to refinance such a loan at a much lower rate of interest.
It used to be that second mortgages on private homes were pretty risky business -- both for the borrower and the lender. Inflation has changed all that, at least for the loan companies, and they've gone into the second mortgages -- I mean, home equity -- business in a big way. For them, there's a great deal of money to be made and little risk.
Virtually anybody owning any kind of home in any desirable location, even for just a few years, has by now a considerable equity -- the value of the house less the unpaid balance of the mortgage. A second mortgage loan secured by this equity is a loan that is practically risk-free to the lender. Such loans are especially attractive to lenders who have been accustomed to making much smaller, mush riskier loans.
Couple this with the fact that in some states there is no limit to the interest a lender may change for such a loan. It is easy to see why such loans are extremely profitable to make, why the loan companies are anxious to make them and why they hate it when such a loan is paid off early.
There is competition, all right, but it usually doesn't come from other loan companies. It comes from people who have made a priftable business of converting high-interest loan company second mortgages to much lower-rate bank loans.
They look up recent recordings of second mortgages and then contact the homeowners involved with an offer to help them obtain a much-lower-rate bank loan to pay off their much-more-expensive loan.
Can they accomplish much?
Here is an actual case shown me by Harold Isaacson of Bank Associates in Northbrook, Ill., who has been in the business for 16 years. For simplification, I've rounded out the figures.
A homeowner's $10,000 second mortgage loan from a well-known loan company carried an interest rate of 21 percent and payments of $302 a month for 15 years. Isaacson's firm was able to arrange a $10,000 loan at a bank at an interest rate of 16 percent, 5 percentage points less.
He says sometimes his hardest job is convincing a homeowner that what's he's offering isn't simply too good to be true.