Maryland home equity loan rate

If recent headlines are to be believed, home equity loans are the 1990s' equivalent of junk bonds. Newspaper reports have lambasted them for luring consumers into hocking their homes for luxury vacations and expensive cars and breaking their retirement nest eggs into a scramble of heavy debts. New figures from the Federal Reserve Board show a 16 percent plunge last year in the equity consumers have in their houses-the biggest drop on record and one blame in large part, on home equity loans.

But to borrowers, this horror tale masks a far more upbeat script. Today, home equity loans remain the only form of personal borrowing, other than mortgage loans, that is tax-deductible. Even without factoring in tax savings, the rates on equity loans are lower than those on any other type of consumer borrowing. The current average pretax rate on a home equity loan is 10.5 percent, against an average of 19 percent for credit cards, 17.1 percent for unsecured personal loans and 11.7 percent for new-car loans. The rate on a typical home equity loan drops to an unbeatable 7.6 percent after tax deductions for a homeowner in the 28 percent tax bracket are accounted for.

In fact, the loans are such a great deal that Congress is starting to have second thoughts about them. In the 1986 Tax Reform Act, Congress retained the loans' deductibility, anticipating that they would be used to pay for home improvements, not cars and vacations. But in recent months, steps have been taken to limit their use. One bill being considered by the House Ways and Means Committee, for example, would allow consumers to use home equity loans to buy cars only if the car is secured by the equity in the home alone and not the car itself. Last year, 38 percent of the loans were used to buy cars and pay for vacations, medical bills, college tuition and other unsecured items, compared with 12 percent in 1989, says the Consumer Bankers Association, which represents banks holding 80 percent of all consumer deposits.

For now, however, home equity loans remain a bright spot in lending landscape. Delinquencies last year were a minuscule 1.5 percent, compared with 6.1 percent for credit card debts, and banks have responded by marketing them aggressively. Not on are interest rates low but many lenders charge no fees for the loans. The loans low consumers to use up to $100,000 of the equity in their homes - the sum of the down payment, principal and appreciation - as collateral. For borrowers with the discipline to keep debt in check, that means more opportunities to customize loans to individual needs. But it can also tempt you with a loan you don't need or one that isn't right for you. Here's how to make the wisest choice.

Risky business. Home equity loans are different, and potentially more risky, than other forms of personal credit for the simple reason that it is the roof over your head that is at stake. An open line of credit, for example, lets you borrow against your home equity as needed and includes a separate checking account or credit card. For the undisciplined, such lines can be a bit too convenient. Your other choice, a closed-end account - today's lingo for an old-fashioned second mortgage-lets you borrow a specific amount for a set period of time at a fixed or adjustable rate. In both cases, banks typically allow you to borrow up to 75 to 80 percent of the equity in your home. Most loans, consequently, are far larger than, say, a standard credit card balance. Moreover, if interest rates jump, so will the minimum payment on your monthly home equity statement typically about 2 percent of the loan's balance, which is divided between principal and interest-unless you have a closed-end, fixed-rate loan. A borrower who is suddenly laid off and can't meet the minimum payment over several months could lose his house, not merely the family car.

As a result, when shopping for a loan you'll want to go beyond checking newspaper ads for the lowest rates. How big a loan you need, what you plan to use it for and when you plan to use it are all factors that might point you to a loan with an especially low introductory rate or one with longer-term advantages.

For example, Chevy Chase Federal Savings Bank in Maryland is currently offering a 5.5 percent four-month introductory rate, one of the lowest in the country. But the deal includes about $800 in nondeductible closing fees, making it less cost-effective for most people than the bank's standard 10 percent no-fee loan. "What you save in interest you won't make up in closing costs unless you spend at least $70,000 during the next three months," says Amy Barry, a loan processor with Chevy Chase Federal Savings Bank.

A bank that advertises no closing costs may not let you off the hook for all charges. A growing number of lenders are now charging annual fees of $30 or more. Many banks have instituted annual inactivity fees of between $50 and $150 for borrowers who take out but don't use an open-ended line of credit, which lets you borrow when you choose, up to a set limit. Would-be borrowers considering an adjustable-rate loan might consider checking the interest-rate ceiling, or cap, that sets the upper limit over the life of the loan. Caps generally average about 18 percent but can run as high as 25 percent.

Locking in low rates. In the current low-interest climate, a traditional second mortgage may make more sense for those who have an immediate need, since it locks in the current low rates. In the past, second mortgages were considered a life preserver for those with heavy debt and nowhere else to turn. But that negative image is long gone. Today, updated as a "home equity loan," second mortgages are seen as a handy tool for financing home improvements and boosting the value of one's house. Eleanore Szymanski, a financial planner in Princeton, N.J., also recommends financing car purchases with fixed-rate closed-end loans rather than risking that rates will rise while the loan is being paid off. A closed-end loan, says Szymanski, also lessens the temptation to extend payments beyond the typical three- to five-year life of the car. Unlike open lines, which have no maturity date, closed-end equity loans require that the borrower complete the repayment in a specific period of time. Likewise, for those who need cash to revamp an outdated kitchen or add on a new family room, a second mortgage will provide just the amount you need without tempting you to dip into your home's equity for a marble Jacuzzi in the master bathroom or a vacation in Tahiti.

What users of closed-end loans gain in stable interest rates, however, they lose in flexibility. Closed-end loans require borrowers to pay interest immediately, while open-ended loans don't charge interest until the homeowner starts actively borrowing from the account. Homeowners who want to consolidate a' multitude of debts, for instance, such as credit card payments, car loans and college tuition loans, would benefit from an open-ended line that lets them juggle several loans and set up their own repayment schedule. Anyone who is paid on a project-fee basis or receives large bonuses at the end of the year can even out cash flow by tapping an open-ended line and repaying the loan when the project check or bonus arrives.

For many borrowers, open-ended lines are often little more than an extra cushion that gives them the confidence they need to plan for the future. When Merlin Hoops, a professor at Trinity Lutheran Seminary in Columbus, Ohio, took out a $50,000 home equity line this spring, he had a variety of uses in mind, including fixing a leaky basement and redoing some areas of his home to accommodate his disabled wife, Elizabeth. "I'm not sure exactly what I'll be using it for, but down the road I think it could come in handy," says Hoops, 64, who plans to retire in the next few years. Some financial planners advise people contemplating retirement or worried about being laid off to take out home equity lines now; banks are less likely to approve a loan when you are unemployed. In such cases, the loan should be dedicated solely to emergencies, such as an unexpected hospitalization. "Once you start using the equity in your home to pay your everyday bills, you are in danger of starting a vicious spiral that could result in losing your house," says Keith Gumbinger, a vice president of HSH Associates, a consumer lending information company in Butler, N.J.