Home equity rates hit all-time low
By Greg McBride • Bankrate.com

Rates on variable rate home equity lines of credit and fixed rate home equity loans are both at the lowest point since being added to Bankrate.com's weekly national survey.

Home equity lines of credit, or HELOCs, have been surveyed weekly since 1992 and currently average 6.82 percent. Fixed rate home equity loans were added in 1997 and currently average 8.89 percent.

Both sit well below levels of one year ago when HELOCs averaged 9.27 percent and home equity loans peaked at 10.28 percent.

Fixed-rate mortgages also sit near the low point of the year. The average 30-year fixed mortgage rate is 6.93 percent, well below the long-term average of 8 percent. The 15-year fixed mortgage, popular for refinancing, at 6.47 percent is also near the lowest point this year.

In light of the recent tragedy and with an increased likelihood of further Fed rate cuts, mortgage and home equity rates seem to point still lower.

The combination of falling rates and rising property values this year has prompted many consumers to tap into the increasing stake of equity at lower and lower rates. Tapping this home equity to consolidate debt, provided you have the means to satisfy your obligation and you're disciplined enough not to run up additional debt, is a prudent use.

So, too, is using the equity and advantageous after-tax rate to invest in a child's college education or perform home improvements that enhance the resale value of the home. Both have a positive rate of return.

But using this equity to splurge on unneeded luxuries -- two weeks at a plush ocean-side resort in Bora Bora, for example -- is a good way to make your house the poor house. Incurring more mortgage debt robs you of a significant retirement asset: owning a home, free and clear.

Also, the homeowner is more at the mercy of property values. Any subsequent decline in the value of a home that is mortgaged to the hilt leaves the homeowner "upside-down."

This unenviable position is common on car loans, where the value of the vehicle often falls faster than the loan balance. The homeowner is truly handcuffed under such a scenario, as even selling the home to move into something smaller would entail coming up with out-of-pocket cash.

Low rates are nice, but in a tenuous economic environment, they don't justify sacrificing future financial stability for short-lived benefit. The prudent actions in this low-rate environment generate tangible benefits, both now and in the future.

-- Posted: Sept. 14, 2001