| With rates up, reconsider (or refi)
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. Meanwhile, 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 do some math and think about the price you're
willing to pay for the flexibility of having a credit line.
If the math in this article makes your head hurt,
you can ask a mortgage broker or loan officer to crunch the numbers.
 Home
equity lines of credit, known to mortgage geeks as HELOCs, usually
go up and down with the prime rate. Credit lines were a great deal
for borrowers from June 2003 to June 2004 because the prime rate
was 4 percent during that time. A lot of homeowners got HELOCs at
prime or close to it. Credit lines remained attractive even after
the prime rate began its slow rise in the middle of 2004 because
the rates still were relatively low -- for a while.
Pendulum swings
The pendulum has swung by 3 percentage points, which is 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.
If you have a credit line, the rate almost surely
is higher than the rate on your primary mortgage. Some borrowers
might want to keep their credit lines anyway. Others might benefit
from doing what's called 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.
"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. Moulton
offers the following example (here comes the math):
How to -- oof! -- weigh your
debt
Let's say you have a $200,000 primary mortgage at a rate of 5.875
percent, plus a credit line with an outstanding balance of $100,000
at 7.25 percent. The first thing to do is add all of the mortgage
debt. In this case, it's $300,000.
Then you divide the amount of the primary mortgage
($200,000) by the total debt ($300,000). The result is 0.67. Multiply
that by the rate on the primary mortgage: 0.67 times 5.875 equals
3.94.
Do the same with the credit line. The outstanding
amount on the credit line is $100,000. Divide that by $300,000 and
you get 0.33. Multiply that by the credit line's rate: 0.33 times
7.25 equals 2.39.
Add those two numbers to get the blended average:
3.94 plus 2.39 equals 6.33. In this example, the hypothetical homeowner
is paying a blended average of 6.33 percent on both mortgages.
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