California credit equity home loan refinance

Although a drop in interest rates usually spurs loan demand, consumers keep shying away from home equity loans in Los Angeles County because of plummeting property values and the rush to refinance, said Southland banking experts.

For the first six months of 1993, the outstanding balance of home equity loans was actually up 2 percent nationwide, but down nearly 1 percent in California, according to financial data from Sheshunoff Information Services Inc., a widely quoted database service based in Austin, Texas.

Banking experts note that since the recession struck the Southland in 1991, demand for home equity loans has dropped, even though interest rates have gone down as well.

"Because of the lingering recession in California, it appears that people don't want to take out loans and bring on more debt," said Tom Celebreezi, a spokesman for the California Bankers Association. Another contributing factor is that many California home-owners have had their equity evaporate in the severe real estate slump.

Home equity loans are secured by a person's house and carry much lower interest rates than unsecured loans, such as credit cards or personal loans. The loans, typically made for amounts between $35,000 and $50,000, can have an annual interest rate as low as 6.25 percent.

Home equity loans come in two forms: line of credit and junior or second mortgage.

A home equity line is an open-end or revolving line of credit without a timetable of payments or a due date. A second mortgage is a closed-end loan that can have a fixed term, fixed rate and fixed monthly payments, or it can carry an adjustable interest rate that fluctuates with an index, such as the prime rate.

Home equity lending fell statewide primarily because of the drop-off in second mortgages, according to Sheshunoff.

To qualify for a home equity loan, homeowners need to have at least 70 percent equity in their home. For a home appraised at $400,000, a homeowner cannot have mortgages exceeding $280,000. Therefore, many Angelenos whose homes have decreased in value no longer can qualify for home equity loans.

Charles Campbell, vice president in the mortgage lending division of Wells Fargo Bank, said what's really driving the drop-off in home equity loans is the rush to refinance.

"Low interest rates have created the largest refinancing boom in the United States and all lines of credit are being included in that business," he said.

With interest rates for home loans now being offered at a 30-year fixed rate of 6.75 percent -- a 25-year low -- many homeowners are refinancing the first mortgages on their homes and rolling in the cost of a home equity loan into the overall price, said Campbell. He said some homeowners are also refinancing to take out equity in their homes, instead of getting home equity lines of credit.

Interest rates on second mortgages are currently at 6.25 percent and 6.68 percent for a revolving line of credit, said Campbell.

Wells Fargo, one of the largest home equity lenders in the United States, only makes loans in California. And its volume of home equity loans is definitely down from last year, said Campbell.

Despite the drop-off in consumer interest, he said, the bank is actively promoting its home equity loans. As he pointed out, the default rate is "insignificant," and the bank always has a home to collect if the homeowner fails to meet his or her loan terms.

Home equity loans surged in popularity after a 1986 tax law change that eliminated interest deductions on other forms of consumer debt. Home improvements are the most common use of home equity loans. But such loans are also routinely used to buy cars, consolidate bills or pay medical expenses.