When members take out a home equity line of credit (HELOC) at Hanscom Federal Credit Union ($1.05B, Hanscom AFB, MA), they have three options for drawing on that account: the traditional way using checks, a credit card attached to the line of credit, or a payment system that allows members to lock in a fixed rate for just a portion of the HELOC.
When a member with a $50,000 line of credit decides to draw $10,000 from the HELOC to pay for a new back patio they can lock in the rate on that $10,000 over either a five- or 10-year term. The HELOC’s remaining $40,000 is still available, and as the fixed $10,000 balance is repaid, that credit becomes available, too. Hanscom allows members to lock in rates for up to three different portions on a HELOC. Members with the highest credit scores and the lowest combined loan-to-value ratios can expect an adjustable rate of prime minus half a percentage point. So, if the rate was fixed at the time of this writing for a 60 month term, the member would pay 2.99% depending on the combined loan to value.
CU QUICK FACTS
Hanscom Federal Credit Union
data as of 3.31.14
HQ: Hanscom AFB, MA
12-MO SHARE GROWTH: 4.3%
12-MO LOAN GROWTH: 10.4%
The niche program offers low-rate lines of credit to Hanscom Federal members. Hanscom has $240.8 million outstanding for the 3-in-1 HELOC, which has an average loan balance of $46,500. Here, Hanscom’s senior vice president of lending, Tom Becker, talks about the HELOC program and why it works for the credit union and its membership.
Why is this a good product for your membership?
Tom Becker: We’re a SEG-based credit union. Our primary group consists of federal employees in Massachusetts. So any of those federal acronyms — FBI, DEA, DOD — any of those folks who are federal employees here in Massachusetts are candidates. We have 11 of our 17 branches in federal buildings and a pretty solid membership. And we have found over the years that federal employees are a good risk. They have high credit scores, a lot of A-plus and A members in that group. And, obviously, a lot of homeowners as well.
How have members responded to the program?
TB: It wasn’t growing much when interest rates were low and a lot of people were refinancing to pay off those HELOCs or second mortgages. But even then we still had people drawing on it. Now, however, as interest rates have started to climb a bit, we’ve seen a lot of people coming in for the home equity line of credit because they don’t want to pay off their first mortgage at a fixed 3% rate. Instead, they want to tap into the equity and do some projects around the house, pay for a college education, purchase a car, or whatever the case may be.
Are there purchases you dissuade members from making with a HELOC?
TB: The one thing we try to deter them from doing is using the equity in their home for credit card debt consolidation. But if the line of credit is used to purchase a car or a college education, where else can you pay for a college education at a rate of 2.75%? Whether it’s putting solar panels on the roof, installing a new heating system, finishing a deck, whatever it is, those are always things that are going to improve the value of your home, and it’s a low interest rate so why not?
How do you respond to people who are concerned about the risks?
TB: Depending on the person’s credit score, we’ll go up to 100% of the home’s value. That’s obviously for our best A-plus and A members. But over time and with our membership, we have found that risk hasn’t been an issue. We’ve had people over the years —especially in 2008, 2009, or 2010 — that got a 100% line of credit and the value of their homes dropped. They were underwater, but they continued to pay us because they liked the house, and were good, solid members.
How do you mitigate risk?
TB: Like everybody else, we’re looking at debt-to-income ratios and stability of income and employment. In addition, we qualify members at the highest payment possible. So if they max out the line at the limit — we’ll say $100,000 — at an 18% rate, which is the highest rate you could possibly be at, that’s the payment we qualify them at. We know if they can handle that payment at the highest limit at the highest interest rate then we’re okay with it.
So good solid employment, good solid ratios, and as credit scores fall so does our loan-to-value. As you start to get into the lower tiers, the Bs and the Cs, that ratio drops to 75% and below.
What value does this bring to your members?
TB: They have their home equity line of credit to draw from, but if they see rates rising or they don’t feel comfortable with that adjustable rate payment, they can fix the rate. That gives them a level of comfort and, combined with the ability to use a credit card to draw on the line of credit, it has all the features that somebody would want to access the equity in their home.