Is February the perfect time to cut ties with big banks and look for a better match?

The Consumerist reports:

“You deserve a healthy relationship with a bank that values you as a customer, instead of jacking up interest rates, cutting your HELOC and your credit card, and refusing to adjust wacked-out mortgages.”

Big banks aren’t always bad. But, recent financial troubles have caused many financial organizations to make sweeping changes that affect everyone – both the responsible HELOC borrowers and the not-so-responsible borrowers. Many HELOC lines have been cut or frozen without personal consideration.

Local banks and credit unions may not always be better. But, at least customers have a good chance of talking face-to-face with someone who can consider their individual situation.

photo credit: joanna8555

See Also:

Negotiating HELOC Terms

Monitor Bank Rates explains:

“Pentagon Federal Credit Union is offering a home equity line of credit (HELOC) with an annual percentage yield (APR) of 3.25 percent. The rate is prime plus 0 percent as of March 26, 2009. This rate is for a variable line of credit and the rate changes once per quarter.”

HELOC rates are now lower than the interest most people are paying for their student loans. Although home equity rates are variable, they’ve only gone down in recent months.

See Also:

How to Get the Best HELOC Rates and Terms

However, in some cases paying a small annual fee could result in overall savings, depending on how you choose to use your HELOC.

The Street reports:

“Many of the fees associated with a HELOC should be avoided, such as an application fee, an appraisal fee, and a “non-usage” fee charged for leaving the money in your line of credit untouched. (The non-usage fee is particularly disagreeable, since one of the main benefits of a HELOC is its usefulness as a safety net in case of emergencies.) But the decision to choose a HELOC with an annual fee depends on whether it offers a better interest rate than non-fee loans and how frequently you plan on withdrawing money.”

Take a look at their article for suggestions on how to determine if an annual fee line would pay off for you, or if you’d be better off with a no-fee HELOC.

photo credit: Medmoiselle T

See Also:

How to Negotiate the Best HELOC Rates and Terms

10 Questions to Ask Your HELOC Lender

However, unlike second mortgage loans, HELOCs have rates that can adjust upward.

Reuters reports:

“Home equity lines of credit (HELOC) currently are charging rates as low as 3.5 percent; they are cheaper than regular mortgages now. But that may not last. Borrowers will have to make their best guess in predicting whether they will be able to pay off their HELOCs before rates rise to mortgage-topping levels. If you’re looking at a very large balance on a HELOC and are uncertain about when — if ever — you will be able to pay it off, consider rolling it into a new mortgage along with your existing loan.”

When taking out an equity loan, borrowers have to ask themselves if they want have the rock-bottom HELOC rates or the rate security of a fixed-interest second mortgage.

See Also:

Is a HELOC Right for You?

Home Equity Loan vs. Home Equity Line of Credit

See: How to Negotiate the Best Home Equity Rates and Terms

The Associated Press explains:

“The Fed, as investors had hoped, announced a half-point cut in the federal funds rate, the interest that banks charge each other on overnight loans, driving it down to 1 percent, a low last seen in 2003-2004. That rate has not been lower since 1958 when Dwight Eisenhower was president.”

Most American home equity lines are based on the Prime Rate which, in turn, is tied to the Federal Funds Rate. Fortunate homeowners who have not received HELOC freeze letters may soon take advantage of these record low rates.

For a more in-depth explanation of how interest rate cuts affect borrowers, see: How Will Federal Rate Cuts Affect Your HELOC APR?

See Also:

How to Negotiate the Best HELOC Rates and Terms

Printable HELOC Comparison Worksheet

The New York Times reports:

“The Fed said in a statement that, because of weakening economic activity, it had cut the Federal funds target rate by half a percentage point, to 1.5 percent. It also cut its discount rate by the same amount. The vote was unanimous…

Federal Reserve officials said Wednesday’s action was the first time ever that the Fed had coordinated a reduction in interest rates with other central banks, though the United States has periodically joined with other countries to intervene in currency markets to stabilize foreign exchange rates.”

Major banks including National City, Wells Fargo, and Wachovia followed suit by lowering their prime lending rates to 4.5%. The prime rate is the rate that is given to the most credit worthy borrowers.

For more information on how this may affect you see: Will Federal Rate Cuts Affect Your HELOC APR?

The Associated Press reports:

“Many believe the Fed will ratchet down a key lending rate to banks — now at 2 percent. In turn, the prime lending rate — now at 5 percent — for certain credit cards, home equity lines of credit and many other consumer and business loans — would drop by a corresponding amount.

Some believe rates could be slashed soon by as much as a full percentage point to 1 percent in hopes of encouraging people and businesses to spend more, thereby restoring confidence to the system.”

Almost all American home equity lines are pegged to the prime rate. A 4% rate for the most credit-worthy customers would definitely be something to talk about. The only problem – who’s left to qualify for these low rates? And, what banks are willing to offer such loans while cutting the lines on thousands of other customers?

See Also:

Will Federal Rate Cuts Affect Your HELOC APR?

How to Negotiate the Best Home Equity Rates and Terms

Today’s Prime Rate

A federal rate cut would have resulted in lower interest rates on most home equity lines of credit. Almost all U.S.-based HELOC rates are tied to the Prime Rate which, in turn, is pegged to the Federal Funds Rate. Generally, the Prime Rate is 3 percentage points above the Federal Funds Rate.

Current HELOC borrowers would have loved the extra relief. However, the Prime Rate is already at a relatively low 5%. Compare that to 20.35% in December of 1980 and 8.03% in September of last year.

For a more thorough explanation of HELOC rates and indexes see: Will Federal Rate Cuts Affect Your HELOC APR?

You may also be interested in the Federal Reserve’s list of historic Prime Rates.

Here are a few HELOC deals out there right now, as discovered by TheStreet.com:

• In Abilene, Texas, Bank of America is offering a rate of 4.99% on lines of credit between $100,000 and $300,000 (up to 80% LTV) with no annual fee.

• In Bradenton, Fla., GTE Federal Credit Union is offering a rate of 4.00% on lines of credit between $5,000 and $250,000 (up to 80% LTV) with no annual fee.

• In Garfield Heights, Ohio, Ohio Catholic Federal Credit Union is offering a rate of 3.74% on lines of credit between $5,000 and $50,000 (up to 80% LTV) with no annual fee.

Check with your local lenders – you may be surprised at what you can find.

See Also:

How Federal Rate Cuts Affect Your APR

How to Qualify for a HELOC