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Equity loans - A fair deal?

August 01, 2004|by JULIE E. GREENE

julieg@herald-mail.com

Just bought a house and already inundated with offers for home equity loans?

That's not surprising, considering how quickly houses have been soaring in value, but people still need to exercise caution when getting a home equity loan, said Joseph Rooney, deputy commissioner of financial regulation for the Maryland Department of Labor, Licensing and Regulation.

Just because people get offers for home equity loans in the mail doesn't mean it is a good idea for everyone, Rooney said.

Rooney said his office gets about 400 to 500 complaints a year about home equity loans. In the fiscal year that ended June 30, Rooney's office received nine complaints about home equity loans from people in Washington County. Only two of those had not been resolved as of July 23.

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The complaints deal with broken promises, payments not being applied on time and scams that come in "all shapes and sizes," he said.

Rooney recommends people wanting a home equity loan deal with a recognized bank, savings and loan or credit union.

"There are some unscrupulous lenders that will lend on equity, not your ability to pay," Rooney said.

A home equity loan allows a homeowner to use his or her home, usually the primary residence, as collateral for a loan, said Mark Harrell, senior vice president at Hagerstown Trust.

How much money you can access through a home equity loan is driven by the value of the home on the open market and how much of the equity the lender will allow the consumer to borrow, Harrell said.

For example, a person bought a house 10 years ago for $50,000 and the house now is worth $100,000. The homeowner still owes $25,000, so the homeowner has $75,000 of equity, Harrell said.

Lenders then determine how much of that $75,000 they will lend out, he said.

Some lenders, such as Hagerstown Trust, will lend 100 percent of that $75,000, Harrell said. Other lenders will limit the loan to 80 percent of the value less other mortgages and a handful of lenders - usually out-of-town lenders - will lend out 125 percent, he said.

If the lender allows the homeowner to borrow 80 percent of the equity, that works out to a $55,000 loan, Harrell said. The lender takes 80 percent of the house's total value, which is $80,000, and deducts the $25,000 still owed on the first mortgage.

There are two big advantages to home equity loans, Harrell said.

From the banker's perspective, a home equity loan is one of the least risky loans, so the banker can be aggressive in pricing and offer lower interest rates compared with other consumer loans, Harrell said.

Also, the interest from home equity loans often is tax-deductible, Harrell said. Consumers should check with their tax accountant about their specific situation.

The interest on most other consumer loans, such as a car loan, is not tax-deductible, so some people use a home equity loan to buy a car, Harrell said.

However, the drawback to a home equity loan is you are putting up your home as collateral for the loan.

"If you use it wisely, it's a very useful tool," Rooney said. "If you use it unwisely, you can lose your home."

To make sure this hits home with consumers, lenders are required to provide home equity loan applicants with a document that explains they are pledging their home for a loan, Harrell said.

Hagerstown Trust gives applicants a document titled "When Your Home Is On the Line: What You Should Know About Home Equity Lines of Credit," Harrell said.

Federal law also requires lenders to provide the consumer the "right of recision," Harrell said.

This gives a consumer who is putting up his or her primary residence as collateral three full business days to back out of the loan at no cost, Harrell said. That means the bank can't release the money and the borrower can't access the funds until that time period has passed.

Home equity loan offers may be showing up in the mail a lot because property values have increased dramatically in recent years and homeowner information is public, officials said.

Tim O'Rourke, supervisor of assessments for the Washington County office of the Maryland Department of Assessments and Taxation, estimates residential property values in the county have risen at least 15 percent this year.

O'Rourke estimated county housing values increased 10 percent to 12 percent each in 2002 and 2003.

Harrell said Hagerstown Trust, like other banks in the area, receives complaints from consumers about junk mail they get for home equity loans that, at first glance, appears to be from local banks.

Some lenders use the local bank's name on the envelope as a trigger to get consumers to open the envelope, Harrell said. For example, the envelope might say "concerning your mortgage at Hagerstown Trust" or "Hagerstown Trust loan number," he said.

The homeowner's name, address, lending institution, loan amount and the house's sale price are public information that some lenders get from deeds at the Washington County Courthouse to solicit loan business, he said.

Harrell said Hagerstown Trust doesn't send mail to people stating they are preapproved for home equity loans.

The bank does use mailings to make customers aware of a particular program that has a nice rate, he said.

Like Rooney, Harrell recommended that consumers who want a home equity loan go to a lender they know.

Consumers may go to www.dllr.state.md.us/finance to see if a lender is licensed by the state agency, Rooney said. Lenders not listed might not be licensed, though there is about a one-week lag time for a licensed lender to get listed on the Web site, Rooney said.

Consumers also may call the Commissioner of Financial Regulation's office at 888-784-0136 to find out if there are any complaints against a particular lender and if so, how many, how many were satisfactorily resolved and how many are outstanding, Rooney said.

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