Home Equity Hybrids

Written by Steve R. Lowry    Thursday, 22 January 2009

Whatever your reason for borrowing, keep your eye out for these features: • Zero closing costs. This is standard in most markets, with the bank picking up the cost of the appraisal and document handling. Reading the line print may show, however, that you're obligated to repay those costs (typically $200 to $300) if you close your line within a year without selling your home. You pay an extra half percentage point or so on your interest rate for the privilege of avoiding closing costs. Some lenders, such as Countrywide, offer an interest-rate break if you pick up the closing costs yourself. That may be the best choice if you plan to borrow a lot of cash, on which you'll be paying heavy interest charges. • Convertible rates. To appease customers uncomfortable with variable interest rates (and to dissuade you from refinancing), some lenders have tacked convertibility features on to their credit lines and loans. In the New York City area, for example, Chemical Bank (800-243-6226) allows borrowers to adjust rates on both fixed-rate home-equity loans and adjustable-rate lines of credit. Chemical's Quick Creditline recently carried an introductory rate of prime minus two points (6.75%) for the first six months and a full rate of prime plus 1.45 (10.2%). If the prime rate goes down, your loan Follows. But you have the option of converting your balance to a fixed-rate loan at the going rate (recently 10.45% on a loan of$25,000 for ten years) if rates go up. You don't pay extra to convert your line into a fixed-rate loan. Fixed-rate borrowers get rate protection, too. Homeowners with a fixed-rate home-equity loan with Chemical don't have to worry that they locked in at a high rate. They may "re-fix" their rate once at no charge if rates go down. • Loans within lines. Bank of America (800-843-2632), based in San Francisco, allows borrowers to carve their credit line into as many as three fixed-rate loans with terms as long as 15 or 25 years, depending on the balance. Your interest rate will be comparable to the going rate for fixed-rate loans on the day you switch. This would allow you, for example, to take out $26,000 on your $50,000 line of credit to buy a new car. You can set it up as a fixed-rate loan, paying, in San Francisco, 9.9% for 48 months, and be assured of paying off the loan before the car turns to rust. The remaining $30,000 of your credit line is still available for other uses. Bank of America lends in Alaska, Arizona, California, Hawaii, Idaho, Nevada, New Mexico, Oregon and Washington (under the name Seafirst). Shawmut Bank (800-333-9999), based in Cambridge, Mass., offers a similar deal. • Easy access. Most lines of credit come with checkbooks that let you tap your credit whenever you need it. At some lenders, they're also being linked to credit cards, debit cards and regular checking accounts. Wachovia Bank (800-922-4684), which lends in Georgia and the Carolinas, even lets borrowers use an automated teller machine to transfer home-equity funds into regular checking accounts, or set up the credit line as overdraft protection. Home-equity advances flow into the checking account to cover an insufficient balance.

Last Updated ( Thursday, 22 January 2009 )