If you own a home and have auto, credit card and other personal debts outstanding, get ready for the bankers' big pitch of 1991: With the prime rate down to 9.25 percent and the Jan. 1 demise of all remaining federal deductions for personal interest, it's home-equity-line time.
You've probably seen the ads already. No points! No closing costs! The lowest introductory rates in town! And it's all yours -- up to $100,000 if you need it -- if you'll just sign up for a line of credit this month.
Commercial bank and thrift institution executives make no bones about the business strategy behind the 1991 home-equity campaign. Home-equity loans are low-risk. And they generate solid profits in a recessionary economy when everything else is going sour.
The Consumer Bankers Association recently surveyed some prominent members of its board of directors -- top officers from institutions like Pittsburgh's Mellon National, First National Bank of Chicago and Buffalo's Goldome.
Goldome's senior vice president, Michael G. Noah, summed up his bank's outlook this way: "We like home-equity lines of credit because they are high-quality assets. And we're finding consumers more responsive to them, unlike a couple of years back when they had sort of a stigma attached to them."
Home-equity-line volumes are booming nationally and now exceed an estimated $100 billion, according to lending industry experts. Savings banks like Goldome are adding $10 million to $12 million in new lines every 30 days.
So what should your response be to the new year marketing push? For starters, take a cold, hard look at your debt situation. Do you have credit card balances sitting at 18 percent a year? A car loan at 12 percent to 15 percent? Other high-rate installment debt? Big expenses just on the horizon in 1991, like college or other educational outlays for kids that will require you to borrow money?
If the answers are yes, make a rough estimate of your total interest payments for the coming year or two. If they are substantial -- and completely nondeductible for federal tax purposes as of Jan. 1 -- you may be a good candidate for debt restructuring via an equity line of credit.
But what do you make of all the competing equity-line ads and direct-mail come-ons? How do you sort out good deals from the bad?
Here are some tips:
Search hard for hidden fees. When a bank advertises "no points" to catch your eye, that doesn't mean no fees or charges. A point is 1 percent of the credit-line amount; $500, for example, on a $50,000 loan. But credit lines commonly entail 10 or more other categories of fees and charges.
Typical fees at large lenders, according to a survey by the American Bankers Association, include application ($100), appraisal ($175), attorneys ($250), loan "set-up" ($100), state mortgage tax ($150), property report ($75), title insurance ($215) and title search ($100).
Get hit with all those by a "no points" home-equity lender and you've still got an extra $1,000 or more on your debt load that you may never have anticipated.
Some banks hit you with an extra $100 to $200 charge if you don't immediately "draw down" a specified minimum amount on your credit line. Ask about it in advance.
Shop hard for equity lines with lower-than-average lifetime rate caps. Some of the highest-volume equity lenders in the country reveal only in the fine print that their variable rate caps are the highest permissible under state usury laws.
Maryland-based $5 billion-asset Chevy Chase Federal Savings bank's heavily promoted "Absolutely No Closing Costs" home-credit line carries a lifetime rate cap of 24 percent. Citibank's "Home Equity Loan Sale" package comes with the same limit. Anyone who thinks his or her credit line could never hit that cap needs to look back to the early 1980s, when the bank prime topped 20 percent.
Shop for low "margins" on top of the prime-rate index, but don't automatically grab the lowest. Competitive banks nationwide offer 1.5 percent over prime on their equity lines -- 11 percent in a 9.5 percent prime-rate environment. If you see a lower margin -- 1 percent over prime or less -- kick the tires. It's possible there are upfront fees or other charges built into the deal to compensate for the lower rate.
Avoid equity lines with prepayment penalties of any sort. After all, if rates start to skyrocket a year or two from now, you don't want to have to pay for your parachute.