Got a Home Equity Line of Credit? Explore Your Fixed-Rate Mortgage Options

Many lenders willing to issue you a home equity line of credit are now allowing customers to freeze their rate on outstanding balances.

Take the case of Andy Hallmark and his wife. They faced a tight squeeze financially, one that’s now bringing pain to many homeowners around the country: Their floating-rate home equity credit line had risen to uncomfortably high monthly payment levels — the direct result of the Federal Reserve’s campaign to increase interest rates steadily over the past two years.

The couple knew its options:

• Hunker down, stick with their $70,000 credit line and risk further payment jumps in the months ahead.
• Consider a mortgage refinance option and pull out an additional $70,000 to pay off the credit line. That’s what’s known as a cash-out refinancing.

According to Freddie Mac, the mortgage investment giant, roughly nine out of every 10 refinancings this year involved cash-outs — many of them to pay off variable-rate credit lines.

But the family decided to try something different and wildly improbable in their estimation. They called their lender and asked to convert their variable-rate credit line into a fixed-rate mortgage loan with a fixed term.

The answer was even better than yes: The rate was fixed well below the 8.25 percent bank prime the floating credit line was tied to, and there were no fees involved. It sounded too good to be true, but was not. No appraisal, credit checks, title or closing costs. It all got done almost overnight.

SETTING THE NEW STANDARD

Although many Florida mortgage lenders aren’t actively publicizing it, people are discovering the new industry standard: Most major players in the home equity loan arena will now allow credit-line customers to escape the Fed’s rate increases and freeze their rate on a portion (or all) of their outstanding balances.

Some banks will even turn your floating rate credit line into a bevy of tax-deductible financial planning choices, fixed-rate and variable-rate.

You might, for example, take your $50,000 floating-rate credit line and convert $30,000 of it into an interest-only fixed-rate note for five years to pay for educational expenses. You might take the other $20,000 and fix the rate with a fully amortizing payment schedule that will retire the balance (principal and interest) in 10-15 years.

“It really turns your line of credit into a one-stop shop financial instrument,” said Brad Conner, president of Chase Home Equity.

A couple with a $100,000 credit line at Chase, for instance, might want to lock the rate on $20,000 for a home improvement loan 18 months after taking out the line. Then they might want to lock another $50,000 for use as a down payment on a vacation condo. They might also want to leave the remaining $30,000 on a floating rate tied to prime, for quick access.

BEWARE: RATE NOT ALWAYS LOWER

While the new rate-lock programs are designed to give borrowers greater certainty about their monthly payments (and, not coincidentally, retain them as home equity customers for the bank) they don’t always produce lower rates or payments.

Peggy Lawlor, a Senior V.P. at Bank of America, says a homeowner who’s credit report is in fine shape could qualify for a $100,000 credit line and a $50,000 balance might be paying 7.74 percent as of right now — prime minus one-half a percent.

If they wanted peace of mind about future rate hikes, they could convert the $50,000 to a fixed rate of 8.09 percent, with fully amortizing principal and interest over 20 years.

“Now the interest rate risk would belong entirely to the bank,” said Lawlor.

A deal like this might make special financial sense to homeowners with a low rate on their large first mortgage — say 5.75 percent on a jumbo mortgage loan that they got in 2003 or 2004.

For such borrowers, a cash-out refinancing might not be as attractive as a rate lock on the $50,000 credit line balance. They’d have to give up a fixed-rate Florida home mortgage with a near-historic low rate, they’d pay all sorts of fees, and end up with a new rate of 6.75 percent or higher on an even bigger jumbo.

BOTTOM LINE: Even if your bank hasn’t told you about it, check out your fixed-rate options. Depending upon your primary mortgage amount, interest rate and the size of your credit line, locking in a fixed rate on a credit line might be your best move.