The Hybrid Home Equity Line of Credit

It’s no secret that home values have sky-rocketed in recent years, pulling home equity rates right along with them for many of the 65% of Americans who own a home. Between the first quarter of 2021 and 2022, U.S. homeowners with a mortgage gained an average of $64,000 in equity in their homes, according to an analysis by CoreLogic. That’s on top of the equity they already had prior to 2021.

Because the jump in equity is an average, those with mortgages in some states, including California, Hawaii, and Washington, experienced much larger equity gains of $141,000, $139,000, and $114,000, respectively, while those who owned homes in Iowa and North Dakota recorded the lowest average equity gains during the same time period, at $17,300 and $19,000 respectively, the CoreLogic data showed.

One of the advantages of being a homeowner is building up a large amount of equity in your home that can eventually be cashed out to use for anything from a remodeling project to college tuition. Equity is the portion of your home that you own. It’s often the difference between what your home is worth and what you owe on a mortgage. For those who qualify for home equity loans, lenders will typically offer a percentage of the equity, anywhere from 60 to 80%, depending on a variety of factors.

Those considering a second mortgage, such as a traditional fixed-rate home equity loan or a variable interest rate home equity line of credit (HELOC) may also be interested in what’s known as a hybrid HELOC. While not as common as the others, some financial institutions have begun offering fixed-rate HELOCs in recent years.

To understand what makes it a hybrid, it’s important to know how it’s different from other home equity loans. A typical HELOC is a variable interest-rate loan, often tied to the prime rate. In our current economic climate, that means recently rising interest rates will almost certainly cause those with a traditional HELOC to see an increase in their interest rate and payments in the next few months.

The appeal of a HELOC is that you can withdraw money as you need it, as with a credit card, rather than getting it all at once. While you are required to pay back the money you take out, you are only charged interest on the funds you use. Like home equity loans, a HELOC usually requires you to have at least 20% equity in your home. With a traditional home equity loan, you are required to borrow all of the money up front, whether you need it immediately or not.

As the name suggests, the fixed-rate HELOC allows a borrower to lock in a fixed interest rate on part or all of the outstanding balance, depending on the lender. Since not all financial institutions offer them, it’s wise to shop around for the best (lowest) interest rate possible.

And like home equity loans, and HELOCs, the hybrid version also calls for you to use your home as collateral. It’s very important to understand that this can put your home at risk if you can’t make your payments or they are late. And, if you sell your home, most HELOCs require that you pay off your credit line at the time of the sale.

The federal Truth in Lending Act requires lenders to disclose the terms and costs of their home equity plans, including the APR, any miscellaneous charges, payment terms, and details about any variable-rate feature. In general, neither the lender nor anyone else should charge a fee until after you have received this information, according to the Consumer Financial Protection Bureau.

Potential borrowers usually receive these disclosures when they get an application form, and will likely receive additional disclosures before the plan is approved and opened. If any term (other than a variable-rate feature) changes before the loan is opened, the lender must return all fees if the borrower decides not to accept the loan because of the change.

With reporting by Casandra Andrews