Jim Palmer's pitch: easy money - second mortgages that exceed your equity may be more costly than you think

Kiplinger's Personal Finance Magazine, Feb, 1998 by Joan Goldwasser

He is the epitome of the celebrity pitchman: Aging baseball great Jim Palmer, no longer on the payroll of the Jockey underwear folks, stars in TV commercials extolling the virtues of loans that allow you to consolidate your debts in "one low monthly payment."

What Palmer is pitching are high loan-to-value second mortgages -- basically, super-size second mortgages that tap up to 125% of the equity in your home. Say you recently bought a $200,000 home with 10% down. Super-high-equity lenders calculate what 125% of your home's appraised value would be ($250,000) and subtract your first mortgage ($180,000) to determine how large a loan you're eligible for ($70,000). If you've piled up, say, $35,000 in high-interest credit card debt, you could pay it off -- decreasing your monthly interest payments -- and still have $35,000 left to use for any other purpose.

Lenders such as the Money Store, Green Tree Financial and First Plus Financial were expected to make $10 billion worth of super-high-equity loans in 1997, double the amount in 1996. But there's a lot you're not told about second mortgages:

* High interest rates. Although they're marketed as second mortgages, lenders treat these loans as unsecured -- and you pay accordingly. Interest rates range from 11% to 14%, far above the average 8.55% for a traditional home-equity line of credit. As with any debt-consolidation loan, your monthly payments decrease if you're using the money to pay off debt from high-interest credit cards. But because you lengthen the payback schedule to 15 to 25 years, you may pay more interest overall.

* Tax problems. You can usually deduct home-equity-loan interest on your taxes, a big selling point for these loans. But the IRS recently warned homeowners that deducting mortgage interest on loan amounts exceeding the fair market value of their home is prohibited. If you use the loan to improve your home and raise its value, you may qualify. But excess interest is not deductible if you use your loan to pay off debt.

* High risk. Although lenders charge as much for these loans as for unsecured debt, you must agree to use your home as collateral. If you are unable to repay, you could lose your home. "We call it `buy a blouse, lose a house,'" says Judy Elliot of the Consumer Credit Counseling Service in Sacramento, Cal. "People should use these loans only for extreme hardships, such as a catastrophic illness."

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