Friday, July 11, 2008
Banking world turned upside down
Here in Lynchburg about two blocks away from each other are the following offers from two different banks.
First Citizen's has a home equity line that has 1) an APR of prime - 1% (that's 4% right now), 2) no closing costs (for lines > $50,000), 3) no early termination fees, 4) generally no appraisal fees (they check recent sales and tax assements in the area). Together, that makes it virtually costless except for the interest.
First National Bank of Altavista has a rewards checking account that pays interest at an APR of 5.01%. There's some other requirements like use of a debit card, electronic statements, and direct deposit, but the most important restriction is they only pay 5.01% on the first $50,000 (1% after that). But if you're married, you can have 2 accounts - 1 in each spouse's name (I guess even more if you're FLDS).
So, you take out a home equity line in the range of 50-100k from First Citizens, write a check to yourself for the full line, walk a block and deposit it FNB Altavista. Voila, you're earning 1% on someone else's money. Note that you only earn that spread if the equity line is on your first/primary home as equity interest is tax deductible - otherwise, you lose money as you actually earn 60% of 5% = 3% (assuming 40% of income goes in taxes) and pay 4%. With the interest deduction, you make 0.6%.
Sure the prime rate can rise, but a) the money is in a checking account with no minimum balance, b) there's no fees for paying off the equity line early. So when the rates cross, you just cash out of the rewards checking account, pay off equity line, and pocket the difference.
Sure 0.6% isn't a huge margin, but that's after-tax income and it's someone else's money you're making the margin on (technically your collateral, though).
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First Citizen's has a home equity line that has 1) an APR of prime - 1% (that's 4% right now), 2) no closing costs (for lines > $50,000), 3) no early termination fees, 4) generally no appraisal fees (they check recent sales and tax assements in the area). Together, that makes it virtually costless except for the interest.
First National Bank of Altavista has a rewards checking account that pays interest at an APR of 5.01%. There's some other requirements like use of a debit card, electronic statements, and direct deposit, but the most important restriction is they only pay 5.01% on the first $50,000 (1% after that). But if you're married, you can have 2 accounts - 1 in each spouse's name (I guess even more if you're FLDS).
So, you take out a home equity line in the range of 50-100k from First Citizens, write a check to yourself for the full line, walk a block and deposit it FNB Altavista. Voila, you're earning 1% on someone else's money. Note that you only earn that spread if the equity line is on your first/primary home as equity interest is tax deductible - otherwise, you lose money as you actually earn 60% of 5% = 3% (assuming 40% of income goes in taxes) and pay 4%. With the interest deduction, you make 0.6%.
Sure the prime rate can rise, but a) the money is in a checking account with no minimum balance, b) there's no fees for paying off the equity line early. So when the rates cross, you just cash out of the rewards checking account, pay off equity line, and pocket the difference.
Sure 0.6% isn't a huge margin, but that's after-tax income and it's someone else's money you're making the margin on (technically your collateral, though).
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