Home-Equity Loans Could Cost Dearly
Storm warnings are finally being raised to the dangers of home-equity loans that are being heavily promoted by lenders.
Consumers Union and the Consumer Federation of America contend that Congress should enact reforms to eliminate pitfalls for borrowers--such as sharp increases in interest rates or “payment shock” when large principal balances fall due.
Specifically, the groups are calling for laws to prohibit balloon payments and caps on how high and fast home-equity rates could rise. Also, the proposed law would strengthen disclosure requirements in advertisements paid for by lenders.
Recommendations are based on surveys of major metropolitan lenders in 14 cities. One study found that no institution offers a fixed-interest rate on its home-equity credit lines beyond an introductory period. In addition, more than 90% of lenders do not set a ceiling on how high interest levels can climb on these loans, which some insist, are really second mortgages.
“Lenders are asking consumers to bet their homes that interest rates don’t rise significantly,” declared the executive director of the consumer federation.
More than two-thirds of the lenders allow borrowers to make interest-only payments on their loans and thus be faced at the end of the loan period with a balloon payment for the full principal.
“Home-equity loans are land mines that could be triggered by income loss, higher interest rates or a large balloon payment,” added the Consumer Federation spokesman. “The resulting explosion could destroy one’s home.”
While conceding the desirability of home-equity loans under some circumstances, the multimillion-member American Assn. of Retired Persons (AARP) expressed similar fears to members:
“If you have to borrow money, a home-equity loan is one of the best ways to do it. The interest rates are well below those offered by other types of credit because lenders use the equity in your home as security for the loan. Moreover, interest on such loans is tax deductible (within limits).
“Many people, however, should think twice before taking out a home-equity loan. Older persons in particular should beware, experts say, because they have more equity in their homes than other people, and thus have more to lose.”
Robert Hobbs, staff attorney for the National Consumer Law Center in Boston, added: “People who wouldn’t dream of getting a second mortgage are taking out home-equity loans. They don’t realize that they’re essentially the same, with all the same risks.”
Among the steps advised by AARP for home equity shoppers are these:
1--Know that they could lose their home if they fail to make payments.
2--Seek an independent adviser, such as an attorney or accountant, to review all loan terms.
3--Borrow only what is needed.
Another red flag of caution has been raised by the Federal National Mortgage Assn. (Fannie Mae), which announced that its mortgage purchase activities in the secondary market will not extend to home-equity lines of credit.
“Fannie Mae is concerned about the potential for homeowners’ use of equity lines of credit to overextend debt, particularly in support of ordinary, day-to-day needs,” explained Chairman David Maxwell.
While admitting some confusion for the public on this relatively new type of loan and a need for consumer education, lender spokesmen do not believe that they are encouraging borrowers to take inordinate risks, and they would generally oppose legislation restricting the convenience of the product.
Fritz Elmendorf of the Consumer Bankers of America said: “These loans are properly used for major items like home improvements and education, and are not properly used for items such as credit-card purchases.”
