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Pitch for home-equity loans are coming shop carefully


WASHINGTON -- If you own a home and have auto, credit-card and other personal debts outstanding, get ready for the bankers' big pitch of 1991: With the prime rate down to 9 1/2 percent and the Jan. 1 demise of all remaining federal deductions for personal interest, it's home-equity-line time.

You've probably seen the ads already. No points! No closing costs! The lowest introductory rates in town! And it's all yours -- up to $100,000 if you need it -- if you'll just sign up for a line of credit this month.

Commercial bank and thrift institution executives make no bones about the business strategy behind the 1991 home-equity campaign. Home-equity loans are low-risk. And they generate solid profits in a recessionary economy when everything else is going sour.

Home-equity-line volumes are booming nationally and now exceed an estimated $100 billion, according to lending industry experts.

So what should your response be to the new year marketing push? For starters, take a cold, hard look at your own debt situation. Do you have credit-card balances sitting at 18 percent a year? A car loan at 12 to 15 percent? Other high-rate installment debt? Big expenses just on the horizon in 1991, such as college outlays for kids that will require you to borrow money?

If the answers are yes, try to make a rough estimate of your total interest payments for the coming year or two. If they are substantial-- and completely non-deductible for federal tax purposes as of Jan. 1 -- you may be a good candidate for debt restructuring via an equity line of credit.

But what do you make of all the competing equity-line ads and direct-mail come-ons? How do you sort out good deals from the bad?

Here are some practical tips:

* Search hard for hidden fees. When a bank advertises "no points" to catch your eye, that doesn't mean no fees or charges. A point is one percent of the credit-line amount; $500, for example, on a $50,000 loan. But credit lines commonly entail 10 or more other categories of fees and charges.

Typical fees at large lenders, according to a survey by the American Bankers Association, include application ($100), appraisal ($175), attorneys ($250), loan "set-up" ($100), state mortgage tax ($150), property report ($75), title insurance ($215) and title search ($100).

* Shop hard for equity lines with lower-than-average lifetime rate caps. Some of the highest-volume equity lenders in the country reveal only in the fine print that their variable rate caps are the highest permissible under state usury laws. Maryland-based, $5 billion-asset Chevy Chase Federal Savings Bank's heavily promoted "Absolutely No Closing Costs" home-credit line carries lifetime rate cap of 24 percent. Citibank's "Home Equity Loan Sale" package comes with the same limit. Anyone who thinks his or her credit line could never hit that cap needs to look back to the early 1980s, when the bank prime topped 20 percent.

* Shop for low "margins" on top of the prime-rate index, but don't automatically grab the lowest. If you see a lower margin -- one percent over prime or less -- kick the tires. It's possible there are upfront fees or other charges to offset the low rate.

* Avoid equity lines with prepayment penalties. After all, if rates start to skyrocket a year or two from now, you don't want to have to pay for your parachute.

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