With rates up, it's time to reconsider home equity lines

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	Posted on Sun, Jan. 15, 2006
	Credit With rates up, it's time to reconsider home equity lines BY HOLDEN LEWIS Bankrate.com It's time to consider whether to keep your home equity line of credit or get rid of it. Rates on credit lines have been rising for a year and a half while long-term mortgage rates have been falling for a month and a half. This up-down combination gives borrowers a chance to pay off their credit lines with other types of loans. To decide whether it makes sense to ditch your credit line, you have to figure out what your loans are really costing you and what price you're willing to pay for the credit line's flexibility. Home equity lines of credit usually go up and down with the prime rate. They were a great deal for borrowers from June 2003 to June 2004 when the prime rate was 4 percent. Even after the prime rate began its slow rise in the middle of 2004, home equity lines of credit, known to mortgage geeks as HELOCs, remained attractive because the rates still were relatively low. Now the pendulum has swung by 3 percentage points, a lot when you're talking about large debts. In September 2003, the average rate on a credit line was 2.08 percentage points lower than the rate on a 30-year, fixed-rate mortgage. At the end of 2005, the rate on the credit line was almost 1 percentage point higher than that of a 30-year, fixed-rate mortgage. Unless you have an old mortgage, the rate on your credit line is higher than the rate on your primary mortgage. Some borrowers might want to keep their credit lines anyway. Others might benefit from a ''cash-out'' refinance of their primary mortgage -- borrowing more than the outstanding balance on the primary mortgage and using the proceeds to pay off the credit line. Still others might want to swap their credit line for another type of equity debt. There are a lot of things to consider. If you keep a low balance on the credit line, it doesn't cost you much every month, and you may want to keep it so you can borrow against it in an emergency. If you periodically draw against the credit line (to pay college tuition, say), and pay down most or all of the balance before using it again, it makes sense to keep it. And if you plan to sell your house within the next three years or so, a cash-out refi would be a money-loser because the closing costs would outweigh the short-term monthly savings. But let's say you plan to stay in the house for five or more years and you keep a balance of many thousands of dollars on your credit line. In that case, consider doing a cash-out refi or other options. ''What I do for people is I look at the weighted average of what their mortgage rate is,'' says Bob Moulton, president of Long Island-based Americana Mortgage Group. The accompanying box shows how to figure out the weighted or blended average, the actual amount of interest a homeowner is paying for the money owed on the home equity and primary mortgage loans. With that knowledge, you'll know what your loans are really costing and whether you should keep or ditch your HELOC. If the math makes your head hurt, you can ask a mortgage broker or loan officer to crunch the numbers for you. In this case, in which the hypothetical homeowner is paying a blended average of 6.33 percent interest, Moulton says the borrowers should do a cash-out refinance and eliminate the risk of the HELOC rate going up even more. Currently, a borrower with good credit might be able to get a 30-year fixed at 6.25 percent, a bit lower than the 6.33 blended average. If the homeowner plans to sell the house within five years, he could get a 5/1 ARM with an introductory rate of 5.75 or 5.875 percent, which could be a good choice for someone who because a 5/1 ARM's initial rate lasts five years, then adjusts annually after that. What about other options? You could pay off the HELOC with a fixed-rate home equity loan. The equity loan's rate will be higher initially, but the prime rate is expected to rise to 7.5 percent or 7.75 percent early this year and could continue to rise. Customers usually have a purpose for their credit lines, such as buying cars or renovating their homes, says Doreen Woo Ho, president of Wells Fargo's consumer credit group, ``and many customers see it as something that they want to pay off sooner.'' When you roll a HELOC balance into a refinance of the primary mortgage, you end up paying interest on your HELOC purchases for the life of the new loan, which usually is 30 years. Keeping that balance separate, in its own equity loan or line of credit, encourages you to pay for those purchases quicker. You pay less interest in the long run.