Home Equity Line of Credit – Market Trends for the Prime Rate Index

The US Federal Reserve has raised interest rates five times since June and more hikes are forecast. Short-term interest rates have risen 15-fold in the past two years, and home equity interest rates are at a five-year high. As a result, the growth of home equity loans, particularly home equity lines of credit (HELOCs) and adjustable rate mortgages (ARMs), is slowing because of their variable interest rates, which are based on a standardized index (e.g. Funds Index, United States One -Year Treasury Bill or Wall Street Prime Index).

Now, in increasing numbers, line of credit borrowers are paying off their home equity lines by refinancing into fixed-rate secondary mortgages. At Wells Fargo, for example, the number of borrowers prepaying their lines of credit has increased by 50% this year. At Wachovia Corp. 40% of customers choose fixed-rate home equity loans, compared to 30% last year.

To attract new borrowers and discourage existing line of credit customers from repaying their loans, lenders “sweeten” the pot. According to RealEstateJournal, US Bank, a unit of US Bancorp, this week introduced a home equity loan with an interest rate of 5.99% locked in for 20 years; previous rates in most markets were 6.99% or higher. JP Morgan Chase & Co. has cut home equity rates for some borrowers on its lines of credit to 0.76% below the prevailing policy rate of 6.75%. Other banks are also offering enticements to discourage customers from paying off their home equity lines of credit.

Borrowers with adjustable-rate mortgages are looking to refinance into fixed-rate mortgages (FRMs) to tie themselves to fixed rates ahead of the next rate hike. Holden Lewis, senior reporter at Bankrate, says: “If you look at mortgage rates, the 13-week moving average is higher than the 52-week moving average; the four-week average is higher than the 13-week average, and this week’s interest rate is higher than the four-week average. The upward momentum is undeniable.” And according to Moody’s Economy.com, more than $2 trillion in adjustable rate mortgages will be offered for repricing in 2006 and 2007.