No, the maximum combined loan to value for that loan is 80%. That includes any other loans such as the HELOC.
So that means even if I found cash to hit the 80%, I would not be able to get a HELOC, because I am right at the 80% mark? That puts a little hitch in my plans...
You stated you need 80% equity.. you sure you don't mean 20% equity, 80% LTV?
In either case, cash is fine.
You need to have the amount of equity they're requiring (I'm guessing 20%, though you say 80%), basically. If you have a HELOC on top of a first mortgage, that could make it so you don't have that equity, you have loans for over that percent of the value.
I'd recommend if you can get the cash trying to get the HELOC at 80% of the value and use that to pay off the first, and have your whole balance at 2.49%.
This is assuming you can pay off the whole thing in 5 years, which is what you're aiming for. That's the only time I'd recommend this PenFed loan, someone looking for a short term very low rate in a push to pay off their mortgage.
If you actually are close to 80% equity, and can pay that last 20% in the next 5 years, do that.
If you don't yet even have 20% equity, I'd keep your fixed rate, or look for another fixed rate mortgage personally.