My mortgage broker offers a Home Equity Line of Credit (HELOC) through either National City or Countrywide. The interest rate on Friday for a $25-50k credit line at LTV < 95% was 7.0%. There is a prepayment penalty if the HELOC draw is paid off earlier than 3 years. The payments are interest only. If I refinance my first mortgage at 80% LTV through this broker, there are no additional closing costs for obtaining the HELOC. QUESTION #1: Do most HELOCs have a prepayment penalty like this one? (I would prefer no prepayment penalty so I could use the credit line as needed and pay it off when I wanted to without penalty...like a credit card.) QUESTION #2: Does this sound like a reasonable rate in today's market for a HELOC, or can I do better elsewhere? QUESTION #3: Would a HELOC from National City or Countrywide be reported on my credit reports as revolving or installment, and how would it likely affect my FICO scores (either with a $50k draw or with a zero balance)?
Most do have an early closure fee due to today's interest rate market. It's the banks way of keeping you THEIR customer, not jumping around every 3 months as the rates change. Ours at Wells Fargo have a "Deferred Origination Fee" if you CLOSE the HELOC before the end of 3 years. You could keep a zero balance as long as you want, but just don't close it. One idea: If you sold your property, or refinanced again and Wells Fargo (for example) was doing NEW mortgage business with you, the fee can be re-credited to you. RATE DOESN'T MATTER! What really matters is your SPREAD above the index. For example: if your rate was Prime + X, then you really need to know what X is! So 7% doesn't tell me anything. Is it Prime + 0% with a minimum of 7%? Remember, almost ALL HELOCs are ADJUSTABLE RATES. Overall, 7% for a 95% LTV HELOC isn't bad at all, but double check what your margin is. HELOCS should report as SECURED REAL ESTATE type loan or line of credit. I don't know how they affect your credit score, but I do know that it will be differenciated in your credit reports. If a REAL PERSON is reviewing your credit files, they will consider secured real estate loans/HELOCS in a different category than unsecured lines and loans.
You might try one of your local banks. The bank we use offers a HELOC package of the following: 700+ credit score, prime + 0, 10 years interest only with an LTV of 70 or less, balloon after 10 years. No closing costs. No prepayment penalties. Pretty nice loan. Mortgage brokerages dont have too much incentive to do HELOCS because they dont pay very well, so they have to charge points to make any money. I think a local bank is the best bet.
Thanks davidkinde and Mediccc24 for your advice. I also spoke to fla-tan (creditnet's resident mortgage expert) privately and he concurs that this is not the best deal. My local credit union is offering prime (4.75) + 0 at 90% max LTV on a 10-year draw, so I will be checking with them this week.
