Mortgage Lenders to Build In Credit Lines
Two of the largest sources of mortgage money for Americans quietly are preparing to introduce a new form of real estate loan designed to transform the credit behavior of millions of homeowners.
Executives from both competing lenders--giant Wells Fargo Home Mortgage Inc. and Countrywide Home Loans Inc.--confirmed in recent interviews that they are developing a new mortgage that would allow homeowners routinely and effortlessly to pay for much or all of their major consumer expenses through tax-deductible housing credit accounts.
The loan under development at Wells Fargo, scheduled for public introduction later this year, would provide homeowners a constantly growing credit-line account accessible by debit card, on top of their regular mortgage. The amount of available credit typically would be the difference between the current market value of the house and the principal balance on the main mortgage segment. That is, the principal mortgage balance and the available home credit line would total 100% of the estimated market value of the property, constantly adjusted for appreciation.
For example, if you bought a $200,000 house with a $20,000 down payment, you’d start out with a $180,000 balance on your main mortgage account and a $20,000 credit line on your housing account debit card. Two years later, if the home had appreciated 10% to $220,000--as estimated by Well Fargo from electronic valuation databases--your credit line would total slightly more than $40,000. The credit line wouldn’t cost anything unless you bought something with it, and would expand automatically without your requesting it.
You would get regular statements reflecting changes in your accounts, for instance: Your original $180,000 balance at 7% is now paid down to $179,000. Your home credit account, based on estimated appreciation, is now $41,000, with a balance at 8.5%.
Under Wells Fargo’s plan, you would not have to apply separately for the credit account. It would simply be an integral feature built into your home mortgage. You could use the home debit card as a tax-deductible, lower-cost alternative to your regular credit card purchases. Or you could lump big expenditures--a new car, college tuition payments, a kitchen remodeling--onto it as you would with a traditional home equity loan.
Unlike traditional home equity loans, however, the built-in home credit account would be dynamic: If home values in your area went up by 15%, so would your home credit line account, automatically. If values dropped by 5%, so would your credit line.
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Charges on any draw downs would carry floating interest rates identical to those on Wells Fargo’s regular home equity credit lines. But as many as eight separate charge items on the account could be converted to fixed-rate interest, whenever the homeowner thought it advantageous to lock in.
Nancy Boles, a group vice president for Wells Fargo Home Mortgage, said the keys to the new home loan account will be its convenience--unified monthly account statements and single monthly payments--and tax-deductibility. The company’s lawyers say interest on both segments of the new mortgage should be tax-deductible for federal tax purposes, according to Boles, but “of course, homeowners should consult their own tax advisors for specific guidance.
Though Boles said consumer research indicates interest in the forthcoming new product “will be very strong,” the loan won’t be for everyone. For starters, only home buyers and refinancers with high credit standings--credit scores that are above the national median and moderate ratios of debt to income--will be qualified to apply.
Wells Fargo’s biggest non-bank competitor, Countrywide Home Loans, confirmed that it, too, has a similar new loan concept under development. For home buyers and owners with solid credit profiles, Countrywide will build in a tax-deductible home equity credit line as part of a unitary mortgage package. There will be no extra fees, application requirements or closing costs. Countrywide managing director Greg Lumsden said the loan “is still in the laboratory,” but the combined segments of the mortgage should total at least 90% to 95% of property value.
Both Lumsden and Boles said the new loans won’t be available to consumers until the current refinancing boom subsides, probably later this year. Staffs at both firms are stretched thin and working overtime to deal with the refi wave, and couldn’t handle a major new product introduction.
But when it’s available, will a flexible home credit account make sense for you? It might, especially if you don’t “max out” on your built-in credit line and then load up on all your other credit cards. The built-in equity line inevitably will be cheaper--before and after taxes--than any other forms of consumer credit.
But, unlike credit cards, your low-cost home credit account will have a sobering potential: If you don’t pay, you could lose your house.
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Distributed by the Washington Post Writers Group.
