| 5 ways to tame your line of credit |
|
|
|
But some use WaMu's hybrid HELOC to consolidate and pay down their debt. Marie Anderson of Moreno Valley, Calif., converted almost all of her HELOC into a fixed-rate loan. She says she had a $65,000 credit line with Countrywide that started out last fall with an introductory rate of 6.3 percent. Then the rate started rising, and hit 12.75 percent in June.
Anderson refinanced in early July by getting a $74,000 line of credit with Washington Mutual. She fixed the rate on the $65,000 balance at 8.4 percent for five years. She can pay interest only, but Anderson says she's going to pay down principal. As for the roughly $9,000 remaining on her credit line: She says she doesn't plan to borrow against it.
5. Cash-out refi
The final way to lower the rate on a credit line is to do a cash-out refinance of the primary mortgage. Here's how it works: You have a $200,000 primary mortgage and a $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.
Bankers and researchers say the cash-out refi isn't as popular as it was last year because mortgage rates have gone up. 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.
But they should at least run the numbers, especially if the balance on the credit line is large, says Anthony Hsieh, president of LendingTree.
For example, if you have a $200,000 primary mortgage
at 6 percent, and a $150,000 line of credit at 8.25 percent, the
minimum monthly payments are about $2,230. That's making interest-only
payments on the line of credit. If you refinanced the entire amount
with a 30-year loan at 6.75 percent, the monthly principal and interest
would be $2,270. For $40 per month more, you're paying principal
on the entire $350,000.
Sometimes it makes sense to refinance at a higher rate. "That sounds completely opposite what a refinance is supposed to do," Hsieh acknowledges. And that's why it's best to look at all the options.
Pitfalls
There are pitfalls to look out for. Hsieh says a cash-out refi might
not be feasible if your total mortgage and home equity debt is greater
than 90 percent of the home's value. And the higher the loan-to-value
ratio, the higher the mortgage rate.
A cash-out refi costs thousands of dollars in fees,
whereas home equity loans and lines of credit have much smaller
fees.
"It's a real careful consideration," says Steve Habetz,
president of ARCServ, a network of real estate attorneys who help
home buyers find real estate agents and lenders. "The biggest concern
that we have at ARCServ is there are so many sales pitches out there."
Sometimes, Habetz says, "the best advice is to do nothing."
Nothing, that is, but keep making timely payments on that credit line.
|
