How to Decide: Home Equity Loan or Line of Credit?

by Wade Barnes 14. September 2011

Home Equity Loan or Line of Credit?

So, you’ve decided to add an addition, pay tuition expense, or have a cushion for life’s unexpected expenses. As your home is one of your greatest assets, many people decide to borrow against the equity in their home by obtaining a Home Equity Loan or a Home Equity Line of Credit. The tough decision is deciding which product will best suit your situation.

When working through the decision of whether to obtain a Home Equity Loan or a Home Equity Line of Credit, there are 4 categories to consider: Access to Funds, Interest Rates, Monthly Payments, and Potential Tax Savings*. By understanding each feature you’ll be well positioned to decide between a Home Equity Loan or a Home Equity Line of Credit.

Access to Funds

Home Equity Lines of Credit are great when you need to access the funds in various increments or need a revolving credit line to pay expense as they occur. With a credit line, you are free to make advances just like you are with a credit card, up to your credit limit within the terms of the agreement.

With a Home Equity Loan, the full loan amount is disbursed in one lump sum, much like a car loan. This is great when you need a set amount and don’t need reoccurring access to the loan.

Interest Rates

For the most part, interest rates tied to Home Equity Lines of Credit tend to be variable, tied to the Wall Street Journal Prime Rate. With a variable rate loan, you get to take advantage of current market rates as they shift throughout time.

Home Equity Loans tend to be fixed rate loans, where the interest rate established at settlement will be the rate you assume for the duration of the loan.

Monthly Payments

Home Equity Lines of Credit are typically interest only for a portion of the term. This means you have the option to pay interest only each month or make additional principle payments as you see fit.

Home Equity Loans generally bill for principle and interest each month. You’ll never have to guess what your payment will be as it will be fixed for the duration of your term.

Tax Deductibility

I would advise you to discuss this with your tax advisor but given your individual circumstance, the interest paid towards either a Home Equity Loan or Home Equity Line of Credit may be tax deductible at the end of the year. As this applies to both Home Equity Loans and Home Equity Lines of Credit evenly, this shouldn’t be a deciding point in your choice between either product.

In short, if you’re looking for flexibility, a Home Equity Line of Credit might be the best product to suit your needs. If you prefer stability, you may want to narrow your search to a Home Equity Loan.

Click here for more information on our Home Equity Loans and Home Equity Lines of Credit.

*Please consult your tax advisor.

Is the Cost of Living and Inflation Higher in Washington-Baltimore Area?

by Anirban Basu 18. July 2011

The Difference between Inflation and Cost of Living

Inflation is defined as an increase or change in the general price level. Generally, inflation is viewed negatively since (all things being equal) an increase in prices reduces purchasing power. The cost of living can be understood as the general price level itself. In other words, a place that is terribly inexpensive to live in can be associated with high inflation, though if that high inflation persists, that place will not remain inexpensive. Conversely, an area that is expensive can be associated with low inflation.

  • Maryland is an Expensive Proposition

Data indicates that Maryland and the Washington-Baltimore area are associated with both a high cost of living and higher rates of inflation than national averages. For instance, 43 states were associated with a lower cost of living than Maryland during the final quarter of 2010 according to the Council for Community and Economic Research (Exhibit 1). Maryland’s overall cost of living is roughly 25 percent higher than the national average, housing is 69 percent more expensive and utility costs are 17 percent higher. Transportation and grocery costs are also higher in Maryland by 8 and 10 percent, respectively.

Exhibit 1. State Cost of Living Rankings, Fourth Quarter 2010
State Cost of Living 2010The recent housing downturn, which has been disproportionately felt on the coasts, has both reduced inflation and diminished the difference in cost of living with the balance of the nation more recently. Consumer prices excluding food and energy expanded 1.9 percent in 2009 in the Washington-Baltimore region and just 1.4 percent in 2010. According to the Federal Reserve Bank of Richmond, the average value of homes in Maryland has declined 21.4 percent since 2007. This has reduced the overall pace of inflation.

However, inflation ran at more than a 2 percent pace during the first three months of 2011 locally, in part a reflection of growing pricing power among area businesses. Between May 2010 and May 2011, core prices in the Washington-Baltimore area climbed 2.3 percent compared with 1.5 percent nationally.

Exhibit 2. Core CPI Growth by Select Metropolitan Area, 2000 v. 2010
]Bureau of Labor Statistic

Despite the recent and ongoing housing downturn, Maryland remains an expensive proposition. Like other Americans, Marylanders have had to deal with a host of rising costs, including food and energy prices.

Indeed, Moody’s Analytics cites high business costs as being one of Maryland’s biggest obstacles to recovery. Operating costs are higher in Maryland because businesses consume pricey energy and transportation. Moreover, the overall higher cost of living necessitates higher wages, which creates further operating cost disadvantages.

This may help explain Maryland’s lackluster job creation in recent months, which has significantly underperformed the nation. One of the questions for state and local policymakers is whether or not there are possible shifts in policy that would help reduce business operating costs without generating substantial harm to quality of life.

1st Mariner Bank - Keeping up with The Joneses

by Kevin Lynch 13. June 2011

I recently attended the Net.Finance conference in Chicago . It is, by far, one of the best conferences for those of us focused on the digital channels of financial services. Over the two and half days, there were three topics that dominated the event: Mobile, Personal Financial Management (PFM) tools, and Social Media. I'm going to specifically talk about the first two topics.

The first day of the conference focused on Mobile Banking services for  customers. Jeff Dennes, SVP Chief Digital Officer of Huntington National Bank (and formerly with USAA), gave the Keynote address. His presentation was full of interesting observations including:

  • There are over 285 million mobile subscribers in the US, a 91% penetration rate.

  • 13.2 million people accessed their bank accounts through mobile sites, up 70% from a year ago.

  • The expansion of the 4G network over the next 2 years will increase bandwidth equal to a cable modem at home.

  • Mobility is driving convergence. The gap between the traditional web and related services is closing, with the increase in smart phones and the movement of the Gen Y's into the workforce.

Jennifer Wilson, SVP Internet Channel Director, BBVA Compass shared her experience with the introduction of ZashPay, a Person to Person payments service from Fiserv. From an adoption perspective, they found that building a web page with a simple enrollment process was key. When they looked at the user base, they found a surprising number of small business customers who were using as an alternative to more expensive ACH services. Given these pilot results, they may develop a mobile invoicing service for their business customers.

We rolled out our Mobile Money offering in August, 2010 and have seen a significant adoption rate. Mobile continues to be a hot topic among financial services providers and may prove to be the most signficant game changer in the next couple of years.

On the second day of the conference, I was fortunate enough to be part of a panel discussion on Personal Financial Management (PFM) along with Patrick Smith of Wells Fargo, Eric Connors of Yodlee, and Edward Chang of Strands. We had a lively discussion about the benefits of PFM for our customers, the challenges of getting people to use it, and the pros and con's of aggregation services. While the benefits are pretty clear (better financial management) the biggest challenge, as noted by Patrick, is inertia. Managing your finances is certainly important, but not critical. Setting up goals and budgets falls somewhere around cleaning out the gutters on the "to do" list. The key, perhaps, is to help educate the consumers about the benefits to make it move up that list.

One of the classic differences between 1st Mariner and Wells is the approach to aggregation. Wells provides tools that help manage those accounts that are with Wells while we offer a service (Mariner360) to add all your accounts, even from other institutions. Perhaps this highlights the major difference between big and small banks. We see this as a service that is the right thing for the customer, while they look at it from an internal perspective of what is right for the organization. We (of course) think ours is the better approach.

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