Mortgage interest rates are at record lows these days, but fewer
people than ever are qualifying for them, because of stricter
lending standards at many banks. Thus, it's perhaps not much of a
surprise that many folks are turning to home-equity loans for
money. That's a double-edged sword, though -- presenting some
danger for borrowers and banks alike.
some upsides to home-equity loans. For starters, if you really need
access to some cash, they can be an effective way to get some.
Secured by your home as collateral, they offer lower interest rates
than those tied to unsecured loans, such as your credit cards. The
interest you pay can also be tax-deductible in some cases.
But like regular mortgages, home equity loans leave you facing
the risk that your home will lose value, and you can end up owing
more than you'll get from the home if you sell it. Since your home
is the collateral, you may end up losing it. And some such loans
have unfavorable terms, sometimes charging you steep penalties if
you try to prepay to save money. Adjustable-rate loans can suddenly
present you with significantly higher and more costly rates.
Finally, although interest rates for these loans are lower than
many options, they're still much higher, on average, than mortgage
and car-loan rates.
Banks at risk, too
Just as waves of mortgage defaults are hitting banks, home-equity
loans are also potential hazards, sometimes seen as ticking time
bombs. For one thing, they're not small sums. At two sample banks,
for instance, the average home-equity loan or line of credit ran
between $75,000 and $100,000.
And with unemployment remaining at very high levels and our
economy in distress, a wave of home-equity defaults may be looming.
The New York Times
, Gretchen Morgenson recently reported that even though most
home-equity loans are seen as "performing," meaning that payments
are arriving on time, those payments are often just for interest,
leaving borrowers at risk of default later.
According to its most recent annual report,
) sports more than $25 billion in home-equity lines of credit that
are still in their revolving periods and therefore subject to
drawdown by borrowers. In its most recent statement,
) reported more than $100 billion in home-equity loans and HELOCs.
) , in its most recent annual report, hinted at a possible
developing problem, noting, "Weak economic conditions and housing
price declines continued to drive higher estimated losses for the
home equity and mortgage loan portfolios." At the end of 2010, the
bank had about $113 billion in home equity loans outstanding. Also
at 2010's end,
Bank of America
) sported a whopping $138 billion in home-equity loans.
Our economy is not yet back on its feet. Thus, our own financial
health and that of banks may be on somewhat shakier ground than we
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