Cash is getting cheap for homeowners tapping equity.
Home equity loan and line of credit rates typically rise and fall with Federal Reserve moves. And the Fed has cut rates aggressively this year to stimulate the economy, so those loan rates are unusually low this summer.
A home equity line of credit in the Buffalo market can be had for a low as 4.99 percent with a six month teaser rate from Charter One Bank. After the introductory period expires, Charter One's price goes to the prime lending rate (currently 7 percent) minus 0.25 percent.
A growing number of consumers are borrowing against home equity lines to finance home improvements, tuition bills, or to wipe out more expensive credit card debt.
But consumers should be careful, because many people get in trouble by consolidating their debts and then charging up credit cards again, said John Y. Pax, executive director of the Consumer Credit Counseling Service of Buffalo.
"People fail to recognize the significance of putting your house up for collateral," Pax said. "If you're going to do that, you have to have a budget and you have to control expenses. Because if you don't do that, you're putting your house at risk."
Home equity loans and home equity lines of credit are two different products. The home equity loan acts like a second mortgage, with a fixed rate and repayment schedule.
The home equity line still places a lien against the house, but it is a variable rate product with no fixed repayment schedule. Consumers can run the credit line up and down, like a credit card. A bill comes each month with a minimum payment due, which is also calculated like a credit card.
Home equity debt has a tax advantage over credit card debt. The interest on home loans is tax deductible, credit card interest is not deductible.
Consumers wanting a large amount of money at one time, and the certainty of a fixed rate and set repayment period, are typically better with the home equity loan, said Mary K. Nassoiy, assistant vice president of consumer lending for First Niagara Bank.
Home equity loans are usually a couple of percentage points higher than 30-year mortgage rates. Equity loans take the secondary lien position to the first mortgage and the bank doesn't collect any fees at closing.
But this year's unusual rate environment has home equity loans near 30-year mortgage rates.
First Niagara's rate on a home equity loan of $50,000 or more is currently 7.99 percent, slightly higher than the bank's 30-year mortgage rate of 7.25 percent.
This means consumers thinking about refinancing a 30-year loan to take cash out should seriously consider a home equity loan because it comes with no closing costs. Refinancing typically triggers $1,500 to $2,000 of closing costs.
The choice between a home equity loan and a cash-out refinance all depends on individual circumstances, such as how much cash is needed and what the interest rate is on the consumer's existing first mortgage, Nassoiy said.
For a consumer already holding a 30-year mortgage rate under 8 percent, tacking on a second mortgage with no closing costs is an attractive option right now, as opposed to refinancing.
First Niagara offers a bi-weekly home equity loan, meaning the borrower makes the equivalent of 13 monthly payments a year instead of 12, which is one of the bank's most popular products. "It's great for consumers because they pay the loan off faster and rebuild home equity faster," Nassoiy said.
Local realtors are "concerned" about the rising popularity of home equity loans, said Bruce Wilson, executive vice president of the Buffalo Niagara Association of Realtors.
The home has typically been one of the great savings vehicles for Americans, but many consumers are frittering away their equity by borrowing, Wilson said.
Consumers living in a region with a sluggish local economy, such as Buffalo Niagara, should be particularly careful, Wilson said. Since property values in some neighborhoods have declined in recent years, it becomes tougher to rebuild equity, Wilson said.
"You could find yourself needing to sell your home for personal reasons and end up in a short sell position where there isn't enough property value to cover the debts on the home," he said.
Home equity lines of credit are popular with consumers who need to borrow varying amounts of money over time, such as parents paying college tuition bills during a four-year period.
Charter One, based in Cleveland, has priced its home equity lines aggressively in an attempt to steal market share from other banks.
"We love this product because it generally puts customers in a better financial position," Karen Bohn, president of Charter One's Western New York Division, said of home equity lines. "We see a lot of people opening these up for home improvements and for emergency credit lines."
Charter One will let consumers borrow up to 100 percent on a home's value. For example, if a person with a $100,000 home has $75,000 left to pay on the first mortgage, the homeowner could borrow $25,000 from Charter One.
The bank's rate of prime minus 0.25 percent only applies up to the 90 percent loan-to-value ratio. Any money borrowed above 90 percent of value is charged at prime plus 1.75 percent, a formula currently totaling 8.75 percent.
The bank will conduct an home appraisal, which is a key step in determining how much money the homeowner can borrow through a home equity loan or line of credit.
Bohn said Charter One sees no problem with property values in the Buffalo area. The market has improved and values are rising in many neighborhoods, she said.
"The appraisals are fine. There's been enough growth in the real estate market to support these loans," she said.