New products keep home loans alive; Banks seek to retain borrowers with line-of-credit offerings

A home equity credit product recently launched by Minneapolis-based U.S. Bank is part of the latest effort by banks here and elsewhere to offer home-owners another way to tap into the value of their homes while rewarding them for keeping their equity loan with the same bank.

“What we’re trying to do is reward longtime behavior,” said Trent Spurgeon, U.S. Bank vice president of consumer credit. At the same time, the bank is hoping its new EquiLine Rate Reward product will keep customers from going elsewhere for home equity lines of credit, he said.

Heather McElrath, a spokeswoman for the American Bankers Association, said home equity vehicles are among many ways banks nationwide are trying to reward customer loyalty.

“As competition gets more intense, banks are responding with innovative products and services to retain customers,” she said.

“It runs the gamut from new things like online banking and bill paying to the return of services that had all but disappeared for a while, like free checking.”

Although many financial institutions – including U.S. Bank – have attracted customers for home equity credit products with low introductory rates, Spurgeon said his bank no longer offers so-called “teaser rates.”

“We think consumers have become more skeptical about home equity products that have a low rate for the first three months and then go up for the next three years,” he said.

The EquiLine product works the opposite way. It opens with an interest rate as low as the prime rate and decreases by one-quarter of a percent every six months, up to a maximum of 1 full percentage point below prime.

In some situations, customers can retain the reductions they have earned even if they close their credit lines, Spurgeon said. For example, if they sell their homes, they would get the same reduction on a new home equity line of credit if that line is opened within 30 days of closing the old line, he said. “This portability feature allows the rewards customers have earned to follow them,” he said.

Here’s an example of how the EquiLine product might work: A customer opens a $20,000 line of credit at the prevailing rate of 4.75 percent. Assuming payments are made on time, the interest rate would be 4.25 percent after a year and 3.75 after two years. If the customer sells that home, the 1 percent reduction would apply to the new line of credit if it is opened within 30 days.

Wells Fargo & Co. has two home equity credit line products that work differently than EquiLine but that also are designed to encourage and reward customer loyalty. One of them, the SmartFit Home Equity Account launched last year, was designed to make it easier for customers to manage debt if interest rates rise, said John Barton, an executive vice president in Wells Fargo’s consumer credit group.

“As the Federal Reserve began to raise interest rates, we heard more from customers wanting to know what this would mean for them. They were looking for options,” Barton said. At the same time, consumers continue to show more willingness to use the value in their homes as an asset in an overall financial management strategy, he said.

The SmartFit account features a 10-year draw period and allows the homeowner to fix the interest rate for three, five or seven years, during which time monthly payments can be tailored to pay off only the interest or the principal and interest on the debt. When that period is up, the balance is converted to a revolving line of credit for what remains of the 10 years or to a fixed-rate loan that is amortized over five to 30 years, depending on the balance.

Another Wells Fargo product, the Home Asset Management Account, allows the homeowner to pair a mortgage with a home equity line of credit. As the principal amount of the mortgage is paid down, the amount of available equity in the line of credit goes up. The account is available on both fixed-rate and adjustable-rate mortgages. Homeowners have the option of converting the balances on the credit-line portion of their accounts to fixed-rate loans.

“People love the control they have over their interest rates with this product,” Barton said. Introduced about three years ago, the account has been one of the bank’s most popular consumer finance products in recent years, he said.

Source Citation   (MLA 8th Edition) Feyder, Susan. “New products keep home loans alive; Banks seek to retain borrowers with line-of-credit offerings.” Star Tribune [Minneapolis, MN], 30 Oct. 2004, p. 01D. Infotrac Newsstand, Accessed 24 Mar. 2019.