Don’t get stuck with high rates

Andy Hallmark and his wife faced the same financial squeeze now bringing pain to thousands of 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 interest rate increases over the last two years.

The Hallmarks, who live in Annapolis, Md., knew the standard options: Hunker down, stick with their $70,000 credit line and risk further payment jumps in the months ahead. Or, they could refinance their first mortgage 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 congressionally chartered mortgage investment giant, roughly nine out of every 10 refinancings this year have involved cash-outs -- many to pay off variable-rate credit lines.

But the Hallmarks decided to try something different, and in so doing bumped into an important change under way in the American home equity marketplace. They asked their lender to convert their variable-rate credit line into a fixed-rate mortgage note with a fixed term.

“We were totally shocked when [the bank] said, ‘Sure, no problem,’ ” said Hallmark. “We had figured there was no way they would let us do it.” But the answer was even better than yes: The rate was fixed well below the 8.25% bank prime the floating credit line was tied to, and there were no fees involved. No appraisals, credit checks, title or closing costs, either, and it all was done almost overnight.

Although many lenders aren’t actively publicizing it, what the Hallmarks discovered is the new industry standard: Most major players in the home-equity 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 smorgasbord of tax-deductible financial planning choices, fixed rate and variable rate. For example, you might 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 to 15 years.

Both the J.P. Morgan Chase and Citibank home equity groups now let floating-rate credit-line customers divide their accounts into as many as five separate “baskets” with different terms and rates, anytime, at no cost.

“It really turns your line of credit into a one-stop-shop financial instrument,” said Brad Conner, president of Chase Home Equity. A married couple with a $100,000 credit line at Chase or Citibank, for instance, might want to lock the rate on $20,000 for a kitchen improvement project 18 months after taking out the line. Then they might want to lock an additional $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 by credit card or check.

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

For example, said Peggy Lawlor, a senior vice president at Bank of America, homeowners with high credit scores, a $100,000 credit line and a $50,000 balance in the Washington, D.C., area might currently be paying 7.74% -- prime minus one-half a percentage point -- on the line. If they wanted peace of mind about future rate hikes, they could convert the $50,000 to a fixed rate of 8.09%, 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% on a jumbo loan they got during the refi heyday years of 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 first mortgage with a near-historic low rate, pay all sorts of fees and end up with a new rate of 6.75% or higher on an even bigger jumbo.

Bottom line on floating-rate credit lines: Even if your bank hasn’t told you about it, check out your fixed-rate options. Depending on your primary mortgage amount, interest rate and the size of your credit line, locking in a fixed rate on a credit line you thought could only go up might be your best move.

Comments for Kenneth R. Harney can be sent to kenharney@earthlink.net.

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Average mortgage rates and indexes

Weekly survey of 60 Southland lenders as of Sept. 20, 2006

*--* Latest week One week previous Six months previous Rates for loans up to $416,999 30-year fixed 6.09%/1.39 pt 6.08%/1.50 pt 6.03%/1.59pt 30-year ARM 3.06%/0.64 pt 3.06%/0.66 pt 3.15%/0.52pt start rate 15-year fixed 5.78%/1.35 pt 5.76%/1.44 pt 5.71%/1.57pt Rates for loans of $417,000 and above 30-year fixed 6.38%/1.35 pt 6.36%/1.43 pt 6.26%/1.50pt 30-year ARM 3.20%/1.09 pt 3.20%/1.09 pt 3.26%/0.67pt start rate 15-year fixed 6.06%/1.31 pt 6.08%/1.31 pt 6.01%/1.54pt FHA or VA 6.59%/1.48 pt 6.61%/1.45 pt 6.43%/0.73pt mortgage Average / points CALVET 30-year 6.50%/0.00 pt 6.50%/0.00 pt 6.00%/0.00pt 6-month LIBOR 5.430% 5.450% 5.070% 1-year Treasury 5.020% 5.020% 4.760% bill 6-month 5.110% 5.120% 4.800% Treasury bill 6-month CD 5.390% 5.380% 5.020% Prime rate 8.250% 8.250% 7.500% 11th District July ’06 June ’06 Jan. ’06 cost-of-funds 4.177% 4.090% 3.347%

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Compiled by National Financial News Services