 Getting
out of a line of credit, or HELOC
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 Dear
Dr. Don,
I have a home equity line of credit (HELOC) for $30,000 that I took out a few years ago during my first refinance to get rid of my original 80/15/5 situation. We wanted to get rid of that 15 percent 30-year term loan, so we went with the line of credit.
Unfortunately, it's tied to prime (prime plus 1 or 2) and has skyrocketed our payments due to the recent rate hikes. Any advice on how we can get rid of this line of credit through a no-cost refinance to a low, fixed rate that's more beneficial and still offers the tax benefits? Our balance is $20,000.
-- Michelle Mortgages
 Dear
Michelle,
There are a lot of people out there in your situation, even though
you got there in a fairly novel way. I'm assuming the refinancing
took you from a home equity loan to a home equity line of credit
at a point in time when there was a pretty big difference in the
interest rates on the two loans.
As I write this, the interest
rates on the two loans are very close, with the national average
for a home equity line of credit at 8.19 percent and the interest
rate on a home equity loan at 7.92 percent. If you pay prime plus
1 percent to 2 percent, and the prime rate is currently 8.25 percent,
that makes the interest rate on your loan 9.25 percent to 10.25
percent.
Depending on your credit score and income levels,
switching back to a home equity loan could give you a little relief
if you would qualify for a home equity loan at a rate close to the
national average. Going from 9.25 percent to 7.91 percent reduces
your interest rate by 1.34 percent and converts it to a fixed rate.
If you got the line of credit a few years ago, the
loan should be past any prepayment penalty period. Still, it's a
good idea to confirm that either by reviewing your loan documents
or asking the lender. Closing costs on home equity loans typically
are quite low, so you shouldn't have to chase the illusion of a
no-cost loan, which doesn't really exist -- the fees are just built
into the loan somewhere else.
Depending on how your first mortgage is structured
and the interest rate on that loan, it could make sense to pay off
the HELOC with a cash-out refinancing of the first mortgage. That's
especially true if you've built up enough equity in the home that
the new mortgage wouldn't require private mortgage insurance, or
PMI. The national average for a 30-year, fixed-rate mortgage is
6.51 percent.
The downside to that recommendation is that closing
costs in refinancing a first mortgage are fairly expensive. Bankrate's
annual survey of closing
costs is just out. If you don't plan on being in the house for
long, or you have a very low interest rate on your existing first
mortgage, then a cash-out refinancing isn't for you.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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