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Variable rate probably OK on home-equity credit line
Deseret News (Salt Lake City), Sep 25, 2005
If you have a home equity line of credit with a variable rate, you may feel as if you're being slowly tortured on the rack by small but painful turns of the interest rate wheel.
Most lines of credit are tied to the prime rate, which goes up and down in lockstep with the Federal Reserve's short-term rate- ratcheting. And those rates have been going up steadily since June 2004.
With more increases almost guaranteed, is it time to lock in a fixed rate to avoid future pain?
Probably not -- unless you think rates will go a whole lot higher. We expect that the prime will rise to 7.25 percent by year- end, and that it will peak at a quarter- to a half-point higher than that during the first half of 2006. That's not much higher than fixed-rate home equity loans, which currently average 7.26 percent.
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It doesn't make sense to lock in a higher rate so that you won't have to worry about higher rates, says Keith Gumbinger, of HSH Associates, which tracks mortgage rates.
There are other disadvantages. With a fixed-rate loan, you lose the flexibility to pay only the interest; you'll have to tackle larger payments designed to retire the loan in five to 15 years. Plus you may have to pay closing costs. And some lenders charge a penalty for closing a line of credit within the first three years of establishing the line.
If you still would rather have a fixed-rate loan, you have a couple of alternatives:
-- Lock in part of your loan. Many lenders have dusted off this option, introduced before the last refinancing boom. You can convert all or part of your outstanding balance to a fixed rate -- once, and sometimes multiple times -- often at no cost. The variable rate would still apply to future draws, preserving your ability to make lower, interest-only payments on the new amounts.
-- Refinance all your mortgages. Another strategy is to refinance your first and second mortgages into one new loan. Rates on 30-year fixed-rate mortgages are still relatively cheap at about 6 percent.
Or if you don't plan to stay in the house for a long time, consider an adjustable-rate loan.
To see if you'd come out ahead while you're still in your house, run the numbers, including closing costs and tax breaks. Try using calculator 3b, Refinancing Two Mortgages, at www.mtgprofessor.com.
Copyright C 2005 Deseret News Publishing Co.
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