Lower your HELOC
You may be one of the unfortunate
home owners that have seen their home equity line of credit
rates double in the past couple of years. The San Diego
Union-Tribune released a July 23, 2006 article, “Options
for lowering the cost of a home equity line of credit,”
by Holden Lewis, which describes a variety of options
for people with high rates on their HELOC.
“Say
you took out a credit line at the prime rate two years
ago and borrowed $30,000 against it. Back then, you faced
a monthly payment of $100. Now that same loan at the prime
rate costs $206 per month.” Just to think, people
are complaining about the increase in gas prices.
One option that you may find desirable, if you are in
this situation, is to keep the credit line and pay the
balance.
“Dennis Grundler of Henderson,
Nev., chose this option. Not counting his mortgage, he
has about $67,000 in debts, spread on various credit cards
with low introductory rates. The home equity line of credit
has a balance of just $12,500, and he says he more than
quadruples his minimum monthly payment of about $86. At
that pace, he can pay it off in less than three years.”
“I am keeping the HELOC because it gives
me added flexibility in terms of cash flow,” said
Grundler.
Another option is to keep the HELOC and just pay extra.
People sometimes choose this option, but usually they
choose to do this out of default because they do not get
around to changing it, or they do not think it really
affects them.
“They keep the credit line,
resolving to grin and bear the higher rate. After all,
the pain probably won't get much worse. Economists and
investors believe that the Federal Reserve has almost
finished raising interest rates.”
You could also pay off the HELOC with a fixed-rate
home equity loan. “For folks who want to pay
down that principal every month, refinancing into a home
equity loan is an increasingly popular option.”
But this is not the most popular option overall because
many people do not want to pay the principal.
Another way to go is to pay off the credit line by doing
a cash-out refinance
of the primary mortgage. “Here's how it works:
You have a $200,000 primary mortgage and $30,000 on a
credit line. You refinance the primary
mortgage for $230,000. That gives you $30,000 cash,
which you use to pay off the credit line.”
Since mortgage
rates have risen though, bankers and researchers claim
that this option is not as popular as it once was.
“Plenty of homeowners have primary mortgages
with rates of 6 percent or lower. Now the average rate
on a 30-year fixed is north of 6.75 percent, and homeowners
are understandably reluctant to refinance at a higher
rate.”
Regardless of which option intrigues you the most, you
should consider all the options. Spend just an hour figuring
out the finances of each option. You may be surprised.
Refinancing with a higher rate may actually benefit you.