"Each individual has to do the math and decide which way to go."
Customers willing to bet the economy will remain weak for a while may want to look first at equity lines of credit. If the Fed doesn't raise rates for a long time, the prime rate will stay low as well.
That's what happened between December 1991 and May 1994, when the prime rate remained below 7 percent and bottomed for many months at 6 percent. Someone who borrowed via a 30-year mortgage refinance at the beginning of that time period, by comparison, would have been stuck with an 8.25 percent interest rate.
Line of credit flexibility
But even if that doesn't happen, lines of credit offer more flexibility than first mortgage refinances. Equity line borrowers only pay interest on what they borrow. If rates look like they're going to rise in a few months, they can pay off what they owe, then not carry a balance until the prime rate and the rates on their lines come back down.Cash-out refinance customers get all their money up front and have to pay interest on the entire balances of their loans until they're paid off.
"The HELOC gives them a lot more flexibility," said Vijay Lala, executive vice president for product development and support at Calabasas, Calif.-based Countrywide Credit Industries, Inc. "It gives them what amounts to a flexible mortgage."
Watch for additional costs
When borrowing with equity loans or lines of credit, borrowers should watch out for additional closing costs some lenders charge when those loans are in the first-lien position.Banks agree to waive costs on equity loans and lines of credit because they don't have to perform many of the same closing and underwriting steps required on first mortgages. Many opt for computerized property valuations rather than full appraisals, for instance, and order title searches, but not new title insurance.
But when someone owns a house free and clear, there aren't any recent mortgage documents and safety checks to fall back on. So, some lenders go through the same steps they undertake on first mortgages and stick customers with the bill.
To help you determine whether you should refinance, use Bankrate's calculator.