YOUR MORTGAGE : Pros, Cons of Home-Equity Credit Cards

Bankers call it the ultimate financing tool for American homeowners. They say it combines record low interest rates with federal tax deductibility, and couldn’t be easier to use.

Consumer advocates call it a disaster waiting to happen. And they have blunt advice to homeowners whose bankers solicit them to sign up: Just say no.

The controversy is over one of 1993’s hot trends in money management: Putting your home equity onto a Gold Visa or other credit card, and using it to convert your entertainment, dining, travel and other personal expenses into mortgage-related debt--with all interest fully deductible against your federal and state taxes.

With a home-equity gold card in your wallet, say proponents, you can slash the interest rate on your charge account balances from 18% to as low as 6 3/8%. You can finance new furniture, kitchen appliances, a new suit of clothes, a trip to Australia--you name it--at close to the lowest home mortgage rates in 25 years. Figure in your state and federal deductions, and hey, you can be paying an effective rate under 5% on your personal expenses. Why would anyone pay 18% ever again?

Thousands of homeowners around the country apparently are coming to the same conclusion, according to banking industry experts. Although no studies have documented the dollar volumes of debt involved, the American Bankers Assn. estimates that over 18% of the 137 major banks with home-equity loan portfolios of $100 million or more offer credit cards tied to consumers’ home-equity balances. Among smaller banks, between 1% and 7% offered cards this year.

Lenders who have introduced card programs in recent months report borrowers are snapping up the product. Greg Imlay of Los Angeles’ Sanwa Bank said the firm’s “Home Maximizer” Visa Gold equity-line card--with a current rate of 6 3/8%--”has attracted a lot of activity” since its July 1 launch. John Hanson, president of Salt Lake City’s First Utah Bank, says his equity card--dubbed “First Line”--has brought in $1.3 million in new loan business. That’s a big splash for a community bank with just $18 million in total assets.

First Utah’s home-equity gold Visa comes with no up-front application, credit check, appraisal or other fees, and carries an 8% rate.

“This is a product that responds to people’s real needs,” Hanson said. “It makes sense to the consumer.”

That may be Hanson’s impression, but it’s not shared by the leaders of top consumer groups. Gerri Detweiler, executive director of Bankcard Holders of America, thinks home-equity credit cards are scary.

“We’re talking about literally eating your home equity for dinner,” she says. “You walk into your favorite restaurant, put the bill on your plastic, and you don’t give it another thought.”

For many consumers who ultimately get into trouble with revolving credit card debt, Detweiler says, “it’s because somehow when they ‘put it on plastic,’ the debt is less real. There’s a temptation (with credit cards) to spend more than you actually have.”

Stephen Brobeck, executive director of the Consumer Federation of America, believes that marketing campaigns to induce homeowners to take out credit cards tied to their equity “border on the irresponsible.” If you overextend your regular Visa charge account, he says, the bank is going to seek a judgment against you. “But if you don’t pay off (your equity gold card) they’re going to take your house away.” The bank ultimately will foreclose, as with any other delinquent mortgage.

Brobeck worries, too, about congressional reaction to the home-equity card trend. “It’s fairly obvious,” he says, that this allows consumers “to turn otherwise non-deductible personal charges into tax deductible charges. If this escalates, I can see Congress or Treasury moving to restrict home mortgage interest deductibility in some unpleasant new way.”

Bankers offering equity gold programs tend to agree that such cards aren’t for everybody. They also say the customers most likely to sign up for them are their most financially sophisticated and relatively upscale borrowers.

Firms like Hanson’s provide every consumer with what he calls “our two-minute speech at closing,” counseling borrowers about the inherent dangers of home-equity credit.

“Perhaps (such cards) should come with credit IQ tests,” Hanson says. “Sure, people can get into problems with them.”

But for borrowers who fully understand the pros and cons, low-rate credit card programs can indeed cut the cost of personal debt.

What to watch out for in evaluating competing plans?

For starters, beware of low note rates accompanied by big application fees; or the reverse. Sanwa’s 6 3/8% rate plan, for instance, comes with $300 in up-front application fees. The Bank of Louisville’s program has a $20 annual fee, but an 11 3/4% rate on the credit line. Some banks say they waive all application fees, but then hit you with appraisal, title insurance and closing expenses that run into the hundreds of dollars.

Look hard at the index to which the base rate is tied. First Utah tacks 2% onto the prevailing prime rate. Sanwa adds 3 1/4% onto the 30-day jumbo CD rate. Both rates could jump significantly in short time periods--jolting homeowners who’d lulled themselves to sleep with cheap debt.