Remember when your home was simply your castle?
That was nearly two decades ago, before Congress changed the federal tax code to make home equity your built-in bank vault – the new centerpiece of millions of Americans’ financial affairs.
An astounding one out of three homeowning households has some form of tax-deductible home-equity access account, up from one out of five just a few years ago and barely one out of 20 in the 1980s, according to banking industry estimates.
Last year, nearly $350 billion of new home-equity lines were opened, along with $90 billion in fixed-term home-equity installment loans. Home-equity line originations in 2003 were almost twice the volume of just two years earlier – a trend lenders say can only intensify as the mortgage refinancing boom dwindles to a whimper this year.
Now, a new wave of home-equity products is about to flood the home real estate market, designed to take the pain – and most of the fees – out of creating, maintaining and drawing down home-equity credit lines. Charlotte, N.C.-based Bank of America is preparing a national rollout this summer of what it calls the “equity maximizer.” The program charges no origination fees, title insurance premiums, appraisal fees, local government transfer taxes or recordation costs.
There are no annual charges to maintain the line, no prepayment penalties if you close it before a specific time period, no fees when you don’t draw it down.
The fee-free credit lines go from $10,000 to $250,000, with maximums tied to the homeowner’s credit score and available equity in the property, up to 100 percent of home value. On lines of $250,000 to $1 million, some fees may be required, according to the bank. Interest rates will be close to the prime rate – currently 4 percent – with discounts for homeowners who have multiple relationships with the bank, such as credit cards or checking accounts.
David Rupp, Bank of America’s product management executive, says consumer focus-group research identified annual maintenance fees, non-usage fees and prepayment penalties as the major features that turn off potential home-equity line borrowers. The same research also documented a desire by homeowners to take advantage of interest rate movements by converting portions of their floating-rate equity lines into fixed-rate mini-loans.
For example, you might have a $100,000 variable-rate credit line and lock $40,000 of it at 4.25 percent to help finance a new kitchen. The program will allow homeowners to convert a credit line into as many as three separate fixed-rate installment loans at no charge.
San Francisco-based Wells Fargo Bank apparently is conducting similar consumer research because it is rolling out a program it calls “smart fit,” which allows home-equity line borrowers to lock their line rates for three, five or seven years to take advantage of low rates and then convert to a floating interest-only rate.
Wells’ new equity line program follows its launch of its “home asset management account,” which provides primary home mortgage borrowers with a built-in “growing equity line” that automatically adjusts in amount annually based on the appreciation rate of the home.
The line not only keeps the borrower’s potential total home-equity credit – first mortgage plus credit line – at 100 percent of the home’s market value, but it also keeps moving up the available credit as the property appreciates.
Although some consumer critics worry that easy-credit programs are encouraging millions of Americans to hock their homes to the hilt, bankers argue that the vast majority of home-equity borrowers are not debt junkies and make moderate, prudent use of their lines.
Chris Reichert, executive vice president of Pulaski Bank in St. Louis, says, “There is virtually no credit risk associated with [home equity lines]. We pay for the closing costs and origination fees because we want these assets so badly.” In his bank’s case, barely one-half of 1 percent of home-equity lines or loans go delinquent.
Doreen Woo Ho, president of Wells Fargo’s consumer credit group, says, “Most prime consumers are not interested in maximizing their debt.” To the contrary, she said, “home-equity borrowers tend to be very cautious” and frequently use tax-deductible credit lines to reduce their monthly credit outlays, paying off higher-rate consumer loans and credit card balances with lower-cost home equity debt.
None of this, of course, changes the sober reality no one should ignore: If you load heavy debt onto your home and things go wrong – the real estate market goes soft, you lose your job – you could also lose your house.
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Ken Harney is a real estate columnist for the Washington Post