|Home equity credit lines
starting to feature fixed rates
Home equity borrowers know the routine: Loans
best suit people who need a specific amount of money and the discipline
of fixed payments; lines of credit work for those who are willing
to accept the risk of rising rates in exchange for the flexibility
to make multiple withdrawals.
But a handful of newer loan programs present
borrowers with alternatives that can save them money, experts say.
These programs feature plain old fixed rates,
or let people take portions of their lines and fix the interest
rate and monthly payments.
"Is a fixed-rate home equity line of credit
a good deal?" quips Nancy Langdon Jones, a certified financial planner
based in Upland, Calif. "Most of my clients have equity lines, and
if they were offered the alternative of a fixed rate, they would
"I would certainly encourage them to."
Specialized home equity lines of credit and fixed-rate
options, like free toaster giveaways and interest rebates, are a
way for banks to try to snag jaded customers in today's crowded
marketplace. In particular, these programs aim to avoid a major
Catch-22 of home equity lines: They offer tax-deductible interest,
but expose people to inflation through variable rates.
The balance on an equity line with a rate equal
to The Wall Street Journal prime rate plus 1 percent, for
example, carries interest of 8.75 percent today. That's all well
and good, but if rates climb again, a borrower could easily end
up paying 10, 11 or even 14 percent down the road, because most
lenders set their equity line interest "ceilings" at relatively
To help borrowers avoid this trap, BankAmerica
Corp. offers fixed-rate options on the lines of credit it offers
in 17 states. The company consists of the former Bank of America
in the West and NationsBank in the Southeast.
"I know that variable rates go up and down,
but here you can actually fix a portion of your balance," says Kris
Walker, the bank's vice president of product development.
"Say you want to buy a car. The fixed rates
in this environment are pretty darn low and you can lock in a rate
up to 25 years to pay for the car. Or if you only want five years,
you can fix it for five years."
The number of options available during the life
of a BankAmerica customer's line varies by location, as does the
amount it costs to exercise each one, she adds. Other restrictions,
such as those limiting the size of each fixed component, also may
If somebody had a $50,000 line and a $30,000
balance, for example, the rate on the outstanding debt would be
8 percent as of Jan. 19, according to Walker. For a fee of $150,
a customer in California could fix a new $10,000 purchase at that
rate for 10 years, resulting in a small loan carved out of the line
of credit. Monthly payments on the fixed-rate portion would be $121.33.
Other lenders offer variations on this theme. First
Essex Bancorp Inc., for one, allows customers to fix portions
of their home equity lines at no charge, according to Alan Jenne,
vice president of consumer lending for the Andover, Mass.-based
People may exercise the lock option three times
during the 10 years they can draw on their lines, though each fixed
balance has to be at least $5,000 and no more than 50 percent of
the overall credit line, Jenne says. Paying down the fixed-rate
debts also frees up money to borrow again in the revolving portion
of the line.
Still, some lenders figure it's best to get
fixed rates right from the start. First Essex, in fact, offers a
fixed-rate line of credit against which borrowers can draw for five
years. As of Jan. 22, it featured an 8.74 percent rate.
"It's very popular here," says Jenne, who figures
two-thirds of First Essex's home equity borrowers choose fixed rates.
"We never really had the equity credit lines priced attractively,
so we came up with this fixed-rate line sort of as a compromise."
Savings Bank of Wall Township, N. J., figures that approach
gives them an edge as well. The small oceanside company offers five-
and 10-year home equity lines at fixed rates that ranged from 7.25
percent to 8 percent in mid-January.
"There's quite a bit of demand for it," says
William Campbell, Manasquan's senior vice president. "The reason
we did it is really competition -- to put us at a competitive edge.
"We would give fixed rates on a non-revolving
loan, so why not do it on a revolving one?" he adds. "In this low-rate
environment, people are looking for fixed rates."
-- Posted: Jan. 27, 1999