Mother-Of-All Credit Lines
August 1, 2002
realtytimes.com
There's a new credit line in the pipeline.
It's cheap, it's tax deductible and it's tied to your home.
It's also questionable.
The mortgage lending factory is manufacturing a one-stop credit line that's equal to the amount of the down payment on your home. With the new loan, your credit line would increase as your home's value appreciates and when it's time to tap your credit line, it's yours for the tapping.
Here's how it works:
You buy a $300,000 home with a $30,000 down payment. You get a $270,000 mortgage and a credit line of $30,000. A year later, your mortgage lender sends you a note saying the value of your home has appreciated by $10,000 and your credit limit is now $40,000. You can choose to use the credit or let it sit until you need it.
You can use the credit anyway you wish. Consolidate debts. Send your kids to college. Travel. Buy a car. The interest is tax deductible on most mortgage debt that does not exceed the property's value and chances are, the interest will be pretty much the same as your existing mortgage.
The loan will give you the option to avoid using exorbitantly expensive retail credit cards, more costly bank credit cards, personal loans and other more costly credit that typically has no tax benefits.
British lenders already offer versions of the proposed new loan and lenders working with Freddie Mac and Fannie Mae are likely to roll out the loans in the U.S. next year.
So what's wrong with a cheap, tax deductible credit line that grows with your home's value?
It has the same risks any loan has when it's tied to your home -- perhaps more.
"Most people try to be responsible with their money, but the lure of quick cash is very great. I already see people who refinance every year to pay off credit cards. They are mortgaging their future and have nothing to show for it. There comes a point where actually losing the house becomes a very real possibility," says Joette Joseph, a branch manager with VP Alliance Title Company in San Jose, CA.
A conservative, but often wise approach to home ownership is not to borrow against its value ever, but to finish paying off the mortgage before you retire so that you can live mortgage-free with what's likely to be reduced income.
"If the homeowner wants to stay in a high-cost area, it is a lot easier when there is no mortgage. An alternative would be to move to a lower-cost area and pay cash for a less expensive house, but again, with no mortgage. I don't think that the (one-credit-line) mortgage is suitable for anyone," said Marie Sternberger, an enrolled agent in Sunnyvale, CA.
Experts say any loan tied to your home's equity is an equity depleting loan and, for those who do obtain them, the credit is best used for capital improvements and other investments that provide a return on your money -- home improvements, education and new business financing.
"If the homeowner borrows more than $100,000 in equity loans and doesn't use the funds for home improvements, the excess may not be deductible. There are some exceptions, like investment interest or business interest," said Sternberger.
Equity also provides shelter from emergencies and unforeseen events that might reduce your income or place added demands on your wages -- job loss, births, illness, injury, death and others. A one-stop credit line that comes with your home purchase could help you sleep at night if you have nightmares about a jobloss or wage cut.
"Having a home equity loan handy in case you need it sometimes makes a lot of sense. If you are afraid of losing your job, get an equity loan now, while you are still employed. That extra cash could tide you over until a new job is found. The good thing about a line of credit is that you don't make a payment until you actually use the funds," said Joseph.
There are some unanswered questions about the proposed line of credit. For example, what happens if you home value depreciates?
"Does the home owner receive a letter saying 'I know last year we told you you had a credit line of $20,000, but now it's only $10,000'? And what if the home owner has used the $20,000 line? Do they need to pay down the loan to make it equal a 100 percent valuation, or is the bank willing to allow the home to be mortgaged over its value?" asks Ida Abelson a broker with Brickyard Realty in Port Richmond, CA.
Abelson questioned how such a loan would be recorded against the property. If it's recorded as a separate equity line of credit it could affect your credit score. She also wonders if the built in credit line would prevent a home owner from securing still more equity credit.
"Refis that come with cash out, but the money (along with the existing first) is limited to 80 percent of the value of the home. Who should use this (proposed single-line of credit) product? Someone with a tremendous amount of self control. It is very tempting to have this kind of money so easily available," Abelson said.
"You'll need to do some financial soul-searching before deciding if this is really a smart move for you. If you are a profligate spender, there will be nothing to stop you from piling on credit card debt. You could end up with high mortgage payments, little equity in your home, and new credit card debt. You could be left with nothing but a house of cards," she added.
Published: August 1, 2002
depreciation?
Oh how common sense, is yet, so uncommon <NG> |
