Study the bank ads carefully, especially those flyspeck-size footnotes that eventually reveal the entire deal. Don't be surprised when you discover that the rate gimmicks are more complicated than you thought. Borrow what you can afford to pay back, and be determined to do it at the cheapest possible cost.
Home-equity loans and lines of credit are the banks' current darlings of the loan business. They work similar to second mortgages; you determine the amount of equity you have in your home, and the bank typically will lend you up to 85 percent of that figure, minus what you owe on your first mortgage.
Your two main advantages with home equity are that all the interest may be tax-deductible and that rates have come down. Most likely, you'll pay the prime rate (currently 8 percent) plus 1 to 2 percentage points, far less than the average rate of 18.88 percent on credit cards or 17.03 percent on unsecured personal loans.
Don't be swayed by advertised freebies when you're deciding which outfit to do business with. In New York, for example, Manufacturers Hanover promotes a 9.75 percent, variable-rate home-equity credit line with "No points. No application fee. No appraisal fee." But a Manny Hanny account representative told us there are closing costs depending on how much you borrow. On a $15,000 loan, they come to $629.
If you opt for a fixed-rate loan instead, the rate will be 11.75 percent on a minimum loan of $25,000, and your closing costs will be $1,058.
Peoples Savings Bank in Worcester, Mass., charges home-equity customers only the prime rate for the first year. Then they have the option of paying a fee of 3 percent of the credit line to lock in prime for an additional nine years, or paying prime plus 1.5 percentage points with no fee.
Other banks, such as Barclays in New York, structure their home-equity rates according to who picks up the tab for appraisal, attorneys' fees and points. The more you pay, the cheaper your rate.
You'll bump into tiered rates, too, during your hunt. For home-improvement borrowers, Bank One's interest rates in San Antonio escalate from 12.25 percent on amounts of $10,000 or more to 16 percent on loans less than $2,500. But, like many institutions, the bank will knock half a percentage point off those rates if you have your monthly payments automatically deducted from your checking account.
The discount is deeper at American Charter Savings in Omaha, Neb.: up to three-quarters of a point if you open a checking account and also buy a life and disability insurance policy to cover you during the term of the loan. On a $5,000 personal loan for 36 months, the policy costs $437.40. Without it, you'd reduce your monthly payment from $184.25 to $172.10.
Remember these pointers when you wheel and deal:
-- Don't borrow more than you can handle.
-- The more business you give the bank, the better the chance for a lower rate.
-- Nothing is for nothing in this world; you'll wind up paying for all those "free" gimmicks somehow.
-- Investigate home equity. The prime rate could go down again, and that type of tax-deductible borrowing could save a bundle over credit cards and other loans.
-- Try to lock up a fixed-rate loan whenever possible. Rates will probably rebound in 1992, and you don't want your wallet to be tied to a rocket.
Robert Heady's syndicated column appears Tuesdays in The Seattle Times. Heady is editor and publisher of four banking publications. |
