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 balance of their mortgage until it's paid off.
"The HELOC gives them a lot more flexibility," says Vijay Lala, execuproduct executive at Bank of America. "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.