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

Bankaholic reports:

“Nationwide Bank has about the best deal around on HELOCs — if you can get one…

Its line of credit is available in all states, carries no annual fee, and pays the first $750 in closing costs, including the appraisal. That should be enough to cover everything, everywhere except in New York and Florida.”

To qualify, homeowners must have significant equity and a credit score above 720. If the Nationwide program doesn’t work for you, check out local credit unions. Many are now offering record low rates on home equity loans for the most credit worthy customers.

See Also:

How to Get the Best HELOC Rates and Terms

How a HELOC Works

Smart Money reports:

“…Many lenders are not making much money off HELOCs. The cut-throat competition during the mortgage boom had lenders slashing rates to well below the prime rate, with no floor on how low they could go, says Frank Ruzicka, a mortgage banker at Cornerstone Mortgage in St. Louis. “I don’t think their models ever predicted that rates would get this low,” he says. Ruzicka’s own HELOC is now at 3%. His lender, Chase, froze his credit line in October 2008.”

Most HELOCs are pegged to the Prime Rate (i.e. they adjust every time this national index rate adjusts). Some HELOCs are a few points lower than prime, some are a few points higher. Creating HELOCs that were a point or so below prime made sense when the rate was around 6%. But, now that prime is at 3.25%, lenders aren’t making much from those credit-worthy borrowers who qualified for the below-prime rates.

For a more in-depth discussion of how HELOCs work in relation to the Prime Rate, see: How to Negotiate the Best HELOC Rates and Terms.

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

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

CNN Money reports:

“HELOCs can be hard to get right now, but they are cheaper than doing a complete refinance. Recently, the average rate on a HELOC was 5.73%, a point lower than the new jumbo loans. What’s more, HELOC generally have no upfront fees. The rub is that HELOCs are adjustable, but with the economy looking sluggish it’s a good bet interest rates won’t rise soon.”

If you qualify to take out a home equity line and you live in an area that is not experiencing dramatic property value drops, it’s worth looking in to.

HELOCs have great rates now. But there are more stable options such as the fixed-rate home equity loan.

See Also:

Is a HELOC Right for You?

Current HELOC Prime Rate

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 

Here are the national overnight averages calculated by Bankrate.com:

 $30,00

HELOC – 4.82%

HEL -  7.71%

$50,000

HELOC – 4.20%

HEL -  8.15%

As you can see, there’s a huge disparity. This makes it very difficult for borrowers to choose between the two loans. Do you want a low rate with the possibility of line freezes and rate increases? Or do you want a high rate with the stability of funds and a known monthly payment?

There’s no right answer, of course. HELOC loans tend to be a risky option right now, but some believe the risk is acceptable for the opportunity to borrow on the cheap.

See Also:

HELOC vs. Home Equity Loan

Is a HELOC Right for You?

Some analysts speculate that this latest cut will be the last for some time. The federal funds rate is already very low and further decreases could escalate inflation.

The official statement from the Federal Reserve seems to indicate that they will proceed with caution in regard to additional cuts:

“Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”

The benefit for current HELOC borrowers may not be immediate. To learn more about how these rate cuts may affect you see: Will Federal Rate Cuts Affect Your HELOC APR?