'Rapid-equity' loans: A quick way to lose money?
When you absolutely, positively have to get your money
overnight, forget about Federal Express. Try a lender that offers
"quick equity" loans. These loans help home equity borrowers
get their money in less time.
One lender provides what amounts to two loans simultaneously
to circumvent closing delays.
Another eliminates some of the steps typically
associated with home-secured loans.
Speedy, special delivery
But while these products can speed up the equity
lending process, borrowers should tread carefully. Quick equity loans,
also called rapid equity loans, typically come with higher rates,
making impatience a costly vice.
"The average home equity loan takes close to
two weeks normally to close, and there are some people who have
a more immediate need for cash," says Fritz Elmendorf, a spokesman
for the Consumer Bankers Association in Arlington, Va. "That
creates an opportunity for some products that advance that more
While home equity loans usually don't take as long
to close as regular mortgages, they still involve some of the same
red tape and processing steps. Banks have to order property appraisals,
for instance, and processors have to verify information about income,
assets and other things borrowers provide.
Federal law also mandates a three-day "right of rescission"
period on home equity loans. In English, that means borrowers have
three days after closing to decide whether they want to keep their
loans or back out completely. Many lenders won't provide customers
with an actual check until after that period expires.
Home equity borrowers typically have to wait two
weeks from the date they apply to get their money as a result of
these obstacles, Elmendorf says.
To compensate, a handful of lenders have devised
specialized loan programs that provide borrowers with cash sooner.
Deep Green Bank of Seven Hills, Ohio, for instance,
offers borrowers what it calls the "QuickCash" loan option.
Home equity by any other name
The process works like this: A customer looking
to tap home equity with a line of credit fills out an application
online. The customer is usually approved within minutes for two loans
-- the QuickCash loan (technically, a separate, unsecured personal
loan) and the standard home equity line of credit.
While waiting for the line of credit to close, the
borrower can have up to $25,000 or 50 percent of the property's
available equity, whichever is less, wired to a designated bank
account. If all goes well, the bank pays off the advance and eliminates
the QuickCash loan when the regular line of credit closes.
"We'll wire funds to you in less than 20 minutes,"
says Jerry Selitto, Deep Green's chief executive officer. He says
the bank has the confidence to do so because it checks an applicant's
credit and property details electronically at the time of application.
"We were sort of thinking about things and saying,
'Gee, everyone in our space advertises decisions in seconds.' But
when you go online, you find out it's conditional. In many cases,
you have to complete a paper application or a loan officer will
call you and discuss it on the telephone," he says.
"We did this as a way to validate our quick decision.
It's a validation that we're serious about two-minute decisions."
As of mid-August, Deep
Green's Web site advertised a QuickCash loan rate of 9.5 percent
and a regular line of credit rate of 6.45 percent. That means someone
who receives an advance but doesn't eventually close on a home equity
line could get stuck paying a higher interest rate to borrow. Selitto
says that shouldn't happen unless there's a problem with the property's
title that isn't caught up front.
Deep Green's approach isn't the only one out there.
Household International Inc. offers a "Personal Loan for Homeowners"
that allows people to borrow between $5,000 and $35,000.
Rates on the loans exceed rates on Household's regular
home equity loans. They vary based on credit, income and other factors,
but the company was advertising a rate of 14.89 percent in mid-August
for a non-revolving, personal homeowner loan vs. a rate of 9.39
percent for a regular home equity loan.
But the personal loans don't require appraisals,
title searches or title insurance, and the company says they close
in less time.
Household officials didn't return requests for comment.
But experts advise people to check the fine print before sacrificing
value for convenience and expediency. If a regular loan takes an
extra week or two to close, yet has lower fees and a better interest
rate, it's probably the better choice.
Waiting also gives borrowers a chance to think about
whether they really want to mortgage their homes to buy expensive
or frivolous items.
"In a lot of cases, it's that rush to get things
done" that causes problems, says George McReynolds, a certified
financial planner in Feasterville, Pa. "People don't take the
time to read the documents.
"If there is really a plan, then two to three
weeks shouldn't be a real issue," he adds. "To hasten
consumption, I don't think it's necessarily a good thing."