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2006: A look back - A look ahead  
  Two events that accelerated home equity debt in recent years appear to be fading.
 Home equity
 Personal finance calendar  Personal finance calendar 

HELOC rates surpass mortgage rates

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.

-- Posted: Nov. 1, 2006
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