Okay, most of you who know me or have read my previous blogs know that I am not a real big fan of the HELOC product for the general masses. I totally respect the fact this product may be very suitable for some but why would folks willingly want to pay a higher pre-determined interest rate with a HELOC than a normal variable rate mortgage (a difference of at least 0.50%)? Perhaps we could simply say that the banks do a great “sell” job at the branch level. Granted, a HELOC is open for payout anytime without incurring a penalty. But how many people do you personally know that regularly pay off their mortgage (say in less than five years) to avoid paying any penalty? With a 5 year closed variable rate mortgage, most lenders will permit anywhere from 15 to 20 % prepayment privilege on a yearly basis. This amount is more than most clients ever dream of paying off their mortgage so quickly.
So what is the big attraction to a HELOC? Perhaps it is simply the re-advanceable nature of this product which permits you to re-borrow what you pay down or that there is ready cash available in the event emergency funds are needed. In my previous blogs you may have read that there are lenders out there that also provide for a “hybrid” type mortgage that is not only re-advanceable but can allow for fixed rate components, lines of credit, variable rate components, and even a couple of Visa’s! But here are some real differences between a HELOC and the “hybrid” re-advanceable mortgage you need to be aware of.
One lender that offers this HELOC product will now allow you to actually lock in any portion of your HELOC at their best fixed rate (variable rates are not allowed). Once the term is up, it simply becomes available as a HELOC again. Perhaps you may even decide to lock in once again. So far so good. Let’s say that you take them up on their offer and lock in a good portion of your HELOC with a 5 year fixed rate term and that in two years time you decide to now sell your property and move to the other end of town. You pay a visit to your local branch and request your existing mortgage be ported (transferred) to your next property in order to not only avoid paying any penalty but to hold on to the remaining 3 years of your great low 5 year fixed rate you received 2 years earlier. This is not an unusual request at all as most lenders will permit portability with their conventional mortgages but this lender will advise you that your original HELOC is a collateral charge on your residence and not a conventional mortgage so the portability feature is not available to you. You will most likely incur a penalty on the fixed portion of your HELOC which is normally the greater of 3 months interest or IRD (Interest Rate Differential). Not only will you be frustrated to have to pay a prepayment penalty on perhaps a very good rate you hate to give up on but you will now need to negotiate a new rate for whatever term you are interested in. Let’s hope that interest rates aren’t too much higher at that time!
The “hybrid” re-advanceable mortgage discussed above will give you much more peace of mind and allow for your various components to be ported to your next residence without incurring any penalty. You still need to qualify again but every lender does that.
If you would like more information on the benefits of a re-advanceable mortgage, please give me (Ed) a call at 250-808-9000 or toll free at 1-888-877-3535. I look forward to talking with you soon.