| With rates up, reconsider (or refi)
home equity lines |
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What can you do with a blended
average?
In this case, Moulton says he would tell the borrowers that they
could do a cash-out refinance and eliminate the risk of the HELOC
rate going up even more.
In the first week of 2006, a borrower with good credit
might be able to get a 30-year fixed at 6.25 percent, which is lower
than the blended average in this example. Or the customer could
get a 5/1 ARM with an introductory rate of 5.75 or 5.875 percent.
The latter option would be a good choice for someone who plans to
sell the house within five years, because a 5/1 ARM's initial rate
lasts five years, then adjusts annually after that.
There are a lot of things to consider here. If you
keep a low balance on the credit line, it doesn't cost you much
every month, and you might as well keep it so you can borrow against
it in an emergency. If you periodically draw against the credit
line (to pay college tuition, say), and pay down most or all of
the balance before using it again, it makes sense to keep it.
And if you plan to sell your house within the next
three years or so, a cash-out refi would be a money-loser because
the closing costs would outweigh the short-term monthly savings.
But let's say you plan to stay in the house for five
or more years and you keep a balance of many thousands of dollars
on your credit line, in that case, consider doing a cash-out refi
or other options.
Other options
What other options? You could pay off the HELOC with a fixed-rate
home equity loan. The equity loan's rate will be higher, but it
won't change. The prime rate, on the other hand, is expected to
rise to 7.5 percent or 7.75 percent early this year.
Another option is to get a hybrid HELOC. Wells Fargo
is the only nationwide bank to offer such a loan, which it calls
the SmartFit Home Equity Account. It has some features of a fixed-rate
home equity loan and some features of a variable-rate equity line
of credit.
SmartFit is a line of credit that you can draw from
over and over again. When you draw from it, the interest rate on
that sum is fixed for three, five or seven years, depending on what
you choose. During that time, you can pay only interest or interest
plus principal. At the end of the fixed period, the rate on that
portion of the balance moves up and down with the prime rate, or
you can convert it into a fixed-rate advance.
The SmartFit account seems tailor-made for people
who have lines of credit with competing banks and who are worried
that rates will continue to rise. The starting interest rate depends
on a number of factors; right now in California, it starts at 7.5
percent and goes up.
It's also a good deal for people who don't want to
pay 30 years of interest on the things they buy with their lines
of credit, says Doreen Woo Ho, president of Wells Fargo's consumer
credit group.
Pay off sooner
Customers usually have a purpose for their credit lines, such as
buying cars or renovating their homes, Woo Ho says, "and many
customers see it as something that they want to pay off sooner."
When you roll a HELOC balance into a cash-out refinance
of the primary mortgage, you end up paying interest on your HELOC
purchases for the life of the new loan, which usually is 30 years.
Keeping that balance separate, in its own equity loan or line of
credit, encourages you to pay for those purchases quicker.
You pay less interest in the long run.
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