How to Look For Good Home Equity Line of Credit Rates

A lot of people would usually say that a person's home is his greatest asset, and indeed it is. Many people apply for loans and use their house as collateral.

People apply for loans for a number of reasons. There are also a lot of options available for them to set up a loan. One of them is Home Equity Line of Credit (HELOC).

How does it work then? Well, first we tackle the basics. A home equity is the market value of a homeowner's interest in their real estate property. Home equity loans are secured by the home itself and interest rates may be fixed or variable.

A HELOC is where homeowners apply for a limited amount of money and make withdrawals on the limit. It is like a line of credit. These may be based on a variable rate that may fluctuate since it is tied to an index rate.

Now, for those who do not want to use a HELOC because there might be monthly changes in rates, then you can look for HELOC loans that offer standard fixed rates. Also, some HELOC loans can convert the variable rate to fixed rate – which can be useful during situations where prime rates are continuously rising. Remember to read the fine print carefully as there are some hidden fees. You might not know that you are being required to pay hidden fees in order to borrow money.

Coping With the Swiss Finish

Credit Suisse spooked the market last week by cutting its group target for return on equity by three percentage points, to about 15%. The move raises the question of how its investment-banking business will earn returns above its cost of equity. The bank may just have to increase its risk appetite.

Credit Suisse's fourth-quarter numbers show why it is struggling to make its cost of equity. In the first half of 2008, its average daily value at risk stood at just over $250 million. Last year, the quarterly average was just over $100 million. Over the past year, there has been virtually no growth in the investment bank's risk-weighted assets. In its client-focused model, 91% of revenue is said to come from direct client business, and that means the volatility has, to a large extent, gone out of the investment-banking business.

Although in 2010 it had losses on six business days, compared with 22 loss days in 2009, the days on which it made revenue of more than 100 million Swiss francs ($103 million) dropped to 19 in 2010, compared with 74 the previous year.

To some extent, the bank has been restricted by the tough Basel III regulations and the so-called Swiss finish, Switzerland's own capital requirements. By 2019, Credit Suisse will have to show a core Tier 1 capital ratio of 19%, of which at least 10% must be common equity and up to 9% can be contingent convertible bonds.

Credit Suisse doesn't break out its return on equity to the level of individual businesses, but some analysts believe it is earning between 25% and 30% from its private-banking and asset-management businesses. That implies that, for an overall ROE of 15%, it must be making just about 10% from investment banking, either below or barely equal to its cost of equity. Chief Executive Officer Brady Dougan says the bank's investment-banking business is profitable. But more clarity in the future would help.

The reality is that the bank needs to put capital into some higher-growth areas. An obvious space is emerging markets, where the bank said its 2010 market share fell to 8% from 12% in 2009. Another area is in the bond market, where it is ranked No. 8 with only a 4% market share.

With 17.2% Tier 1 capital, and core Tier 1 of 12.7%, it can afford to get more aggressive. It just has to go out and win market share.

—Joe Ortiz

ISS IPO won't be a party

With a secondary buyout deal for Danish outsourcing firm ISS AS falling through, the most likely route for the company is now an initial public offering. The alternative, a breakup of the 525,000-employee company, the world's fourth-largest private employer, wouldn't be easy.

Current owners EQT Partners AB and Goldman Sachs Capital Partners bought ISS in 2005 for $5.1 billion and are looking to cash in. But having failed to make a sale to private-equity group Apax Partners, an offering looks inevitable.

Apart from pricing, where and when to list present conundrums for ISS's underwriters. The IPO market in Europe is still struggling for momentum, although secondary equity markets have been gaining strength. Bankers will recall last year's underwhelming IPOs of Betfair and asset manager Gartmore Group. U.K. retailer New Look contemplated a float last year but gave up and is still privately owned.

That said, in many ways ISS makes a good IPO candidate. It runs a global business. It is showing signs of looking past the credit crisis—revenue grew 7% year-to-year in the third quarter of 2010—and its margins are growing faster than revenue. One negative is its relatively high debt, a legacy of ISS's private-equity ownership. Net debt is 6.5 times current earnings before interest, tax, depreciation and amortization, which compares with an average ratio of 2.2 for the sector.

The company likely has an enterprise value of between $10 billion and $11 billion, which implies an equity value of between $4.3 billion and $5.3 billion, assuming net debt of $5.7 billion. This is based on 2009 financials, the latest available, and growth assumptions of around 15% over the subsequent two years.

The company is keen to first list at home in Denmark, and then in London. But the Danish stock market may not offer the liquidity that ISS would want. London, however, is already home to companies with which it can easily be compared. Serco Group PLC and Compass Group PLC trade at nine times and 10 times Ebitda, respectively.

Assuming EQT and Goldman stumped up 20% of the takeout back in 2005, they are in line for an internal rate of return of around 30%. They have already rejected an outright sale, claiming Apax's $8.5 billion play was too low. The 2010 financials will shed some light on whether that was a good offer.

Negative Home Equity Surges, Weighing on Housing Recovery

The number of borrowers who owe more on their mortgages than their homes are worth took a huge leap in the fourth quarter of 2010. A full 27 percent of borrowers are now "underwater" on their mortgages, up from 23 percent in the previous quarter, according to a new report from Zillow. Foreclosure moratoriums and falling home prices are to blame.

Adding to a slew of negative reports on home prices, Zillow found home values posted their largest quarter-over-quarter decline, 2.6 percent, since the beginning of 2009.  The home buyer tax credit, which inflated home prices artificially in the first half of the year, resulted in a Fall hangover. Home prices plunged 5.9 percent compared to the fourth quarter of 2009.

With foreclosure moratoriums in place due to charges of faulty paperwork at some of the nation's largest mortgage servicers, many homes with underwater mortgages that should have been repossessed by lenders were not, and instead boosted volume in the negative equity pool.  Falling prices didn't help.

"Home value trends in the fourth quarter remained grim, but the good news is that these declines, while painful in the short-term, mean we're getting closer to the bottom," notes Zillow's chief economist, Dr. Stan Humphries.

Home prices generally lag home sales, on the way up and on the way down.  Home sales have gained over the past few months, but with distressed sales, that is foreclosures or short sales, making up anywhere from 25 to 50 percent of a local market's numbers, prices will continue to be under pressure for some time.

Negative equity is one of, if not the, primary drivers of mortgage default, but as banks ramp up repossessions, the percentage of underwater loans should fall back to previous, albeit historically high, percentages.

While local markets in Florida, California and Arizona that suffered most from the subprime mortgage collapse continue to post high negative equity rates, other less likely candidates are climbing.  Over one third of Chicago borrowers owe more than their homes are worth, and in Atlanta over half are underwater.  Denver and Minneapolis are also well over the national rate.

Negative equity not only makes it harder to sell a home, it also makes it more difficult to modify a troubled loan. Some also blame negative equity for high redefault rates on loan modifications, as some borrowers choose to walk away.

Home Equity Line of Credit

Home equity as a source of a line of credit

If ever you are in need of borrowed funds, one practical and handy source of credit is a home equity line. To begin with, a home equity credit line will offer you a large amount of cash with a comparatively low rate of interest. It also gives you some tax benefits not available with other kinds of loans.

HELOC and security for the loan

Home equity lines of credit (HELOC) will require property to be pledged as security for the loans. Obviously, this kind of borrowing may jeopardize your home and you, if you default on a loan or even if you are late with your monthly payments.

A loan with a balloon payment, that is a large payment at the end of the loan term, may result in your borrowing more money to pay off the debt. It may also put your home at risk, if in the course of the original loan you are deemed ineligible for refinancing. In the event that you sell your home, the conditions of most loans will require you to pay off all debts on your credit line at that time. While home equity loans provide you with ready cash quite easily, you tend to borrow more freely as well.

Always compare HELOC rates from several lenders to assure that you get the lowest rate possible.

Alternatives to home equity line of credit and home equity loans

It is important to bear in mind that there are many other ways to borrow money besides home equity credit lines. Second mortgage installment loans are one such viable option. Certainly second mortgage plans place an extra future burden on your home or property, in terms of an added mortgage. But the money lent is usually given as a lump sum, not as advances through continuous charges to a card or checking account. Also, a second mortgage generally has a fixed rate and fixed monthly payments.

Another option, preferred to borrowing money outright, is a credit line that does not use your property as security. Under the right conditions, that also might be available to you with a credit card, or an unsecured credit line allowing you to write checks whenever you need the funds. Information about loans for specific items, such as auto purchases or tuition fees, is available at your request.

New mortgage rules: how you might lose out

Joe may not realize it, but the latest moves from the Minister of Finance, Jim Flaherty, have hurt his chances of meeting his retirement goals.

Mary is in the top tax bracket. She is 40 years old and wants to grow her wealth intelligently. She believes that in the next five years, she is extremely likely to generate investment returns that will beat her 2-per-cent after-tax borrowing costs (3.65 per cent mortgage with 46 per cent deductibility).

Her goal is to be able to retire at 55 so she can volunteer full time at a community hospice where she is currently helping out. She wants to lock in five-year rates, borrow $300,000 on her $600,000 of real estate equity to invest in a portfolio with a yield of over 4 per cent. She correctly believes that there is a very strong probability that she will come out ahead using this strategy, and can deal with the financial downside in the event that the strategy doesn't work.

Unfortunately, Mr. Flaherty has inadvertently made things tougher for Joe and Mary. I don't think this is right.

Even though the new rules are only aimed at "high-ratio" mortgages where someone is borrowing at least 80 per cent of the value of the property, these changes will likely affect all mortgages in short order.

To review the new rules:

1. Maximum amortization has been reduced to 30 years from 35 years. Compare that to the previously available 40-year mortgages and interest-only mortgages, with no forced payment of any principal.
2. When you want to refinance your mortgage, you can now borrow up to 85 per cent of your property value, down from the 90 per cent available in 2010. Before 2010, you could have borrowed up to 95 per cent.
3. The government will no longer provide insurance backing on home-equity lines of credit.

If we look at Joe's situation, the second rule will have no effect. What Joe needs is to borrow some funds from his $1-million house in order to cover his expenses for the next decade or so. Joe and his wife are very unlikely to still be in their home 10 years from now, and when the house is sold, any debt will easily be paid off.

If Joe manages to get a line of credit, he is now faced with the prospect that the rate will increase in two ways. The first is that as a variable rate, when (not if) interest rates rise, Joe will have higher rates. The second is that in any case where a bank sees greater risk, they raise rates. Without government insurance, even for a small percentage of a bank's line of credit assets, look for banks to hike line of credit rates across the board. If you read the fine print on your line of credit documentation (and who really does that?), the bank has significant flexibility to adjust rates higher whenever it deems it necessary.

If Joe decides he doesn't want to go the line of credit route, he can likely get a mortgage. The benefit is that there is a mortgage contract, and if it is a fixed-rate mortgage, this eliminates the interest rate risk for Joe during the life of the mortgage. The downside is that he will want to borrow a larger amount than he needs in the short term. Now there is a new downside. Joe isn't a 28-year-old who needs big brother government to ensure he pays off his debt faster. Joe simply wants to leverage his real estate equity. But guess what? With a 30-year amortization, Joe needs to meaningfully pay back his principal, when that is the last thing he wants to do.

You might say that this 30-year maximum amortization only applies to high-ratio mortgages, but as we saw with a similar ruling on 40-year amortizations, the banks quickly made the change on all mortgages. It will very likely happen the same way this time, with most if not all 35-year amortizations disappearing from the mortgage market.

In Mary's case, the issue isn't going to get a lot of sympathy, but Mary has no reason to want to pay the loan down. It is inefficient for her wealth-building strategy to draw down investment assets to pay down a loan. Her strategy is the exact opposite. She wants to borrow to invest. She can pay the loan off after five years – most likely with some meaningful profits left over. Why should Big Brother looking out for high-debt ratios put limits on Mary's wealth-building strategy? She is fully aware of the risks and rewards and wants to move forward.

When it comes to the new rules, I begrudgingly believe that the government has a right to intervene. After all, around the world we have seen governments (and taxpayers), left holding the bag on insolvent banks and individuals. Nevertheless, is it really OK for the government to make Joe and Mary's retirement goals more difficult to achieve?

The Reverse Mortgage Gets a Makeover

A reverse mortgage has long been considered a loan of last resort because of its high fees. Now, a new type of reverse mortgage is attracting the attention of more-affluent borrowers eager to extract cash from their homes. But older homeowners—and the adult children who advise them—need to be aware of the new trade-offs.

Reverse mortgages allow people age 62 or older to convert their home equity into cash. The homeowner can elect to receive a lump sum, a line of credit or monthly payments. The loan is due, with interest, when the borrower dies, moves, sells the house or fails to pay property taxes or homeowner's insurance. (With a conventional loan, such as a home-equity line of credit, a borrower can tap into a home's equity but must make monthly repayments.)

One of the biggest criticisms of reverse mortgages is their upfront fees, which can total as much as 5% of a home's value. Last fall, the Federal Housing Administration, which insures virtually all reverse mortgages, introduced the "Saver," which reduces these fees by about 40%. Lenders such as MetLife Bank, Bank of America and Wells Fargo have since begun marketing them.

To cover its potential losses on a reverse mortgage—which can occur when a home isn't worth enough to repay the loan—the FHA traditionally pockets as much as 2% of the value of the property. This "mortgage insurance premium" is typically the largest upfront charge in a regular reverse mortgage.

With the Saver, the FHA has cut this insurance premium to 0.01%. That is because homeowners who apply for a Saver are typically limited to borrowing about 80% to 90% of what they could get with a regular reverse mortgage, says Peter Bell, president of the National Reverse Mortgage Lenders Association. On a $500,000 home, for example, a 75-year-old New York resident would receive about $262,000 with a Saver, versus $331,500 with a traditional reverse mortgage, according to MetLife Bank.

The lower lending limits mean the FHA is less likely to incur a loss—allowing for a smaller insurance premium.

Waiving Fees

At the same time, many lenders are reducing or waiving other fees on all reverse mortgages, including servicing fees and the upfront "origination fee," which is generally 2% of the first $200,000 of a home's value, plus 1% of the balance up to a maximum of $6,000. (Because of projected losses on reverse mortgages issued in its current fiscal year, though, the FHA recently raised a separate mortgage-insurance premium it levies to 1.25% from 0.5%.)

One caveat: While fee reductions can be especially attractive these days on fixed-rate reverse mortgages, these generally require borrowers to take out a lump sum and pay interest on the full amount over the loan's life.

Whether a Saver makes sense for you or your parents depends on how much money you need and the amount of time your loan will remain outstanding, among other factors.

Typically, reverse mortgages are used for long-term needs, such as medical expenses. But the Saver "increases the ways in which older homeowners might use a reverse mortgage," says Barbara Stucki, vice president for home-equity initiatives at the nonprofit National Council on Aging.

For instance, a borrower paying high upfront fees "may need to stay in the home a long time before the benefits of a reverse mortgage exceed the costs," Ms. Stucki says. But with the Saver, that calculation could be different.

Matthew Gregory, an Atlanta-based reverse-mortgage consultant at Generation Mortgage, says a 68-year-old client with a $635,000 home near Dallas recently opted for a $300,000 Saver to avoid tapping his savings for a few years. "He thinks his investments are likely to appreciate by more than the housing market," Mr. Gregory says.

Lower 'Effective' Rates

The client, a retired management consultant, could do better with a Saver than a home-equity line of credit, Mr. Gregory says. The Saver's 4.01% "effective" rate—consisting of a 2.76% variable interest rate, plus a 1.25% annual fee—"compares favorably" with the 4.78% variable rate the client would pay for a home-equity line of credit, he says.

Although closing costs on the Saver are higher, the client plans to hold the reverse mortgage long enough to come out ahead thanks to the lower interest payments, Mr. Gregory says. The client also didn't want to worry about his wife being saddled with monthly loan payments if something were to happen to him.

So far, lenders say, Saver loans appear to be attracting a more-affluent borrower who likes the idea of a smaller reverse mortgage and lower fees. At MetLife Bank, for example, customers with a Saver have an average home value of about $350,000, versus $250,000 for those with regular reverse mortgages.

Still, there are downsides to Saver loans. The loan amount is smaller than that of a traditional reverse mortgage. And some lenders charge slightly higher interest rates on Savers, in part because of uncertainty over investors' interest in buying them. MetLife Bank, for example, charges 5.25% for a fixed-rate Saver, versus 5% for a standard reverse mortgage.

While "it may be appropriate to pay a higher interest rate to get a lower upfront fee," Ms. Stucki says, such a move could backfire if a borrower plans to keep the loan for a long time.

Before talking to lenders, homeowners should consult a reverse-mortgage counselor approved by the U.S. Department of Housing and Urban Development, which oversees the federally insured reverse mortgages that account for some 99% of the market. For more information, call 800-569-4287 or go to www.hud.gov.

Debt Consolidation Loans for Bad Credit Customers

Digital News Report – Now that the holidays are over many Americans are looking for ways to consolidate their high-interest credit card and personal debt. There are many options available, even for people with less-than-perfect credit.

Initial estimates from Mastercard indicate that holiday spending this season increased more than five percent over the previous year. Much of that debt was placed on credit cards.

Wells Fargo and other banks are ready to help consumers deal with their debt. The debt might include credit card debt, student and car loans.

The bank says you do not need a home to acquire a debt consolidation loan. "But what if there's no home equity to leverage because you rent?," the bank asks in a statement. "You may still have options."

There are two types of personal loans: unsecured and secured. Wells Fargo says customers can use their vehicles for bill consolidation. This may provide customers with a lower interest rate and make qualifying easier.

The bank lists several other reasons you might want to use a car as collateral for debt consolidation.

The goal is to lower the interest rate and monthly payment. One bill a month can also make things less complicated. There is "no direct cost to apply".