http://business.bostonherald.com/realestateNews/view.bg?articleid=160096&srvc=biz

By Kenneth R. Harney/ The Nation’s Housing
Sunday, October 1, 2006
Andy Hallmark recently faced a financial squeeze familiar to thousands of Americans: The interest rate on his home-equity line of credit (HELOC) had shot up to uncomfortably high levels.
    But Hallmark decided to try something other than refinancing his loan or biting the bullet and paying big mortgage bills for a while. Instead, he called his bank and asked to convert his floating-rate HELOC into a fixed-rate second mortgage - and surprisingly, the lender said “yes.”
    “We were totally shocked when (the bank) said ‘Sure, no problem,’ ” Hallmark said.
    His bank offered a fixed-rate loan carrying a decent interest rate, but requiring no closing costs, home appraisals or credit checks - and it all got done almost overnight.
     It turns out Hallmark had inadvertently discovered a new mortgage-market trend.
    These days, major banks are quietly letting clients convert floating-rate HELOCs and home-equity loans into fixed-rate second mortgages - for free.
     Traditionally, those wishing to get out of floating-rate mortgages had to refinance their loans, often paying big fees in the process. Borrowers typically had two choices:
     Convert a floating-rate loan into a fixed-rate second mortgage.
    Do a “cash-out refinance” of the home’s first mortgage, using proceeds to pay the floating-rate loan off.
    Unfortunately, both options usually involved large refinancing charges.
    But lenders have recently become more flexible - partly to keep borrowers from taking business elsewhere.
    Today, some banks will convert your floating-rate debt into a fixed-rate mortgage for free, or even turn your loan into a smorgasbord of several mortgages.
     For instance, both JPMorgan Chase and Citibank now let customers divide existing HELOCs into as many as five separate “baskets” of loans.
    Say a homeowner with children in college wants to convert a $50,000 floating-rate HELOC into a fixed-rate loan.
    This person can refinance into two fixed-rate mortgages.
    A $30,000 interest-only five-year loan can cover tuition bills, while a $20,000 15-year loan can pay off the rest of the HELOC’s balance.
    “It really turns your line of credit into a one-stop-shop financial instrument,” Chase Home Equity President Brad Conner said.
     Such arrangements can protect you from possible future interest-rate hikes.
    However, they don’t necessarily translate into lower monthly mortgage bills today.
    For instance, a homeowner with good credit and $50,000 owed on a $100,000 HELOC will currently pay about 7.74 percent interest on their line of credit.
    By contrast, converting this debt into, say, a 20-year fixed mortgage will mean locking into a roughly 8.09 percent interest rate.
     Nonetheless, such a move can still make sense if you have a low-rate primary mortgage that you want to keep.
    Say you have a 5.75 percent first mortgage that you got when rates bottomed out in 2003.
     You don’t want to do a cash-out refinance to pay off your HELOC, because doing so will cost you your 5.75 percent rate.
    In such cases, converting a HELOC fee-free to a fixed-rate loan can make sense.
    The bottom line for consumers? Even if your bank hasn’t told you about it yet, ask what options you have for converting floating-rate mortgages into fixed-rate loans.
    Given today’s interest-rate uncertainty, moving to fixed mortgages might be smart.
Harney is a nationally syndicated real estate columnist.