| HELOC rates surpass mortgage rates |
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Hud, wide-eyed,
whispered, "What?"
"At the end of that year, the average HELOC rate was just three-tenths of a percentage point lower than the 30-year rate. Just six months earlier, it had been almost one and a quarter percent lower.
"So people were refinancing their mortgages like crazy
and they were taking out these
big ol' HELOCs to pay off their
credit cards or buy cars or
fix up their houses. That was
the year when I bought you both
lots of expensive Christmas
presents.
"Well, that mean old Fed kept raising short-term interest rates every six weeks for two whole years. It was like being spanked 17 times in a row! By the beginning of 2006, the average HELOC rate was more than a percentage point higher than the 30-year fixed. Some people were paying off their HELOCs, and some were taking advantage of hybrid HELOC products that allowed them to set a fixed rate on a portion of their balance. And some people kept their HELOCs but they were all grumbly about those high interest rates.
"It got even worse as the year wore on. By this fall, the
average HELOC rate was almost
2 percentage points higher than
a 30-year fixed. Some people
were even refinancing to a higher
rate on their 30-year fixed
so they could consolidate their
HELOC debt into it and thereby
get a lower blended rate."
Hud's eyelids
were fluttering. Sallie said,
"What about home equity
loans, Grandpa?"
"They gradually went up about half a percentage point through 2006," Grandpa said. "People didn't talk much about home equity loans, but customers continued to get them. In the spring, HELOC rates actually passed home equity loan rates. You would think that would get people to switch to home equity loans, but HELOCs have a big advantage: for the first 10 years, you have to pay only the interest on a HELOC. You have to pay interest plus principal on a home equity loan. And a lot of Americans aren't interested -- ha ha! 'Interested,' get it? -- in paying principal."
Sallie snuggled her bunny and said sleepily: "Did someone tell those mean people at the Fed to knock it off?"
"Yes. At the end of June they stopped raising the federal funds rate every six weeks. HELOC rates stabilized at right around the prime rate of 8.25 percent, while home equity loan rates continued to rise and mortgage rates steadily fell."
Grandpa paused,
trying to come up with a moral
to the story. He needn't have
worried, as both children were
breathing deeply, eyes closed.
He carefully arose from the
end of Hud's bed, turned off
the light and left, leaving
the bedroom door open just a
crack.
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