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5/5 Home Equity Line of Credit: PenFed does it again!
As regular readers know, we're huge fans of Pentagon Federal Credit Union here at RTM. They not only give members many of the best financial deals available anywhere, but they're regularly innovating, offering new products that just make sense.
The latest jewel they have unveiled is their 5/5 Home Equity Line of Credit. If offers all the flexibility of a conventional HELOC, with essentially none of the risk.
This line of credit adds a 2% margin to the 5-year CMT, a rate which can be studied here. Once you lock in a rate, that rate stays fixed for five years, no matter how market rates fluctuate, or how much you need to borrow! After that, the rate "resets once every 5 years by no more than 2%, never to exceed 5%, above or below the initial rate. [The] Rate will adjust to the index and margin or to our then current 5/5 ELOC rate, whichever is lower."
That is an astonishingly attractive deal at a time when the 5-year CMT currently sits at 1.60%. For five years beginning now, you can enjoy a fixed rate of 3.6%--a much lower rate than any 5-year adjustable mortgage, much less a 30-year. Moreover, if you hold the line for at least 3 years, you pay no closing costs, save possibly for an appraisal if the line is over $50,000 in size.
Then if you want to roll it over for another five years, the absolute worst case scenario is that you pay a whopping 5.6%--again fixed for another five years. Of course any time you don't need the money, or can get it at a cheaper rate elsewhere, you can simply pay down the line and owe nothing!
So are there any downsides?
Need for responsibility. Well, as with all HELOC products, you need to make sure that you have the discipline not to run it up irresponsibly. Since it can be drawn back up to its limit for the first fifteen years, a borrower will not be forced to accumulate the same equity that she would with a conventional mortgage. But assuming the borrower doesn't need this "forced savings", this element of a HELOC is a great benefit, not a detriment--especially when the rate is this remarkable!
Somewhat higher initial rate. Conventional HELOCs are readily available at rates of 3% or less. And that will likely be true for a year or more, since our economic meltdown should keep short-term rates muted in the short term. However, since rates might very easily spike in the mid-term, I see this as a small price to pay for the piece of mind of a 5/5, sub-4% rate.
Possible appraisal cost. PenFed says that the member is responsible for appraisals on lines > $50,000. From experience, I suspect their may be some flexibility there. But borrowers should be aware that there are other HELOC lenders who charge no closing costs at all, even for appraisals. Even so, since appraisals should run $500 or less, this shouldn't be a major impediment to any sizable line.
Bottom line: this is a remarkable deal. No one else I know of offers anything like it. If you are looking for a home equity line, a home equity loan, or even to just refinance, you owe it to yourself to consider this option.