Home equity line of credit choices

Home equity loans and lines of credit

We have written a lot about how smart it is to have a home equity line of credit. Once approved for a credit line, a borrower may take a little at a time of all of it at one time. Unlike a traditional home equity loan, which has a fixed rate of interest, a fixed amount borrowed and a set repayment plan, a line of credit offers much better flexibility. If you don't want to take out any cash at all, you can do that, too. By taking out the cash only when necessary, a home equity credit line makes a great rainy day fund. The rates of interest are adjustable, and the payment schedule is versatile, much like repaying a credit card balance.

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What should you do if you have a home equity line of credit as rates are escalating? With interest rates rising, a line of credit does not look so affordable. A line of credit taken out three years ago now has regular payments that are double what they were and those rates and payments are likely to keep rising in the future.

You have a couple of options:

Keep the home equity line of credit - If you are only keeping the line of credit for crisis use and don't have a balance, you may wish to simply keep it and not worry about it. A home equity line of credit remains a very convenient financial tool, even if it costs more than a few years ago. You could do nothing and simply acknowledge that rates are higher and consider that a cost of having a credit line. If you have a small balance, you might just want to pay it down and put the line of credit aside for a while.

Refinance the whole home - You might, in effect, do two things at once by refinancing both your first and second mortgages at one time. With a cash-out loan, you refinance the home for the remaining balance plus the amount that you owe on the home equity credit line, after which you can pay off the line of credit with the extra cash. This may be a great time to do a cash-out refinance if your home is funded with an adjustable rate loan and you would like to convert it to a fixed rate loan. It is still possible to simply refinance the whole house with a cash-out refinancing.

Get a "convertible" credit line - Some lenders advertise a line of credit that lets you convert all or part of your balance to a fixed-interest rate. The terms for a "convertible" credit line will vary by lender, but you might inquire about it.

Turn it into fixed-rate financing - Changing to a fixed-rate will cost you flexibility, but you will have the peace of mind that comes from knowing that you have a fixed monthly outlay until your balance is repaid. You could talk to your lender and see about changing your line of credit to a fixed-rate home.

Each borrower will have his own special needs, so there is no single answer that works for everyone. If you have doubts about what you should or shouldn't do with your line of credit, consult with your lender.

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