How to minimize the costs on your HELOC

helping_user

Interest rates on home equity lines of credit (HELOC) have become twice as much higher in the past 2 years. Say for example, if you have borrowed $30,000 as credit line at the Prime Rate 2 years ago, you had to pay $100 monthly. Now that payment goes up to $206 per month on the same loan amount. So, either you lower the costs or get rid of the loan as quickly as possible.

If you already have or wish to take HELOC, there are some options to protect you from rising rates.

Pay off with a fixed rate loan :
You can pay off the line of credit using a fixed rate home equity loan. But opt for this, if you are willing to pay a part of the principal monthly. This is a popular choice; about 7 in 10 second mortgages are home equity loans whereas the number was 1 in 10 a year ago.
Take hybrid credit line with fixed-rate option :
Apply for a hybrid credit line, which will allow you to avail fixed rates on a part or whole balance of the credit line. So, you get a combination of fixed and variable rates. This gives you the chance to make stable payments for at least a part of the loan and offers some relief from rising rates.

Caron · Posted: Wed Jul 19, 2006 3:12 am Post subject: RE: MInimize costs on HELOC

Hi,

There is another option by which one can avoid the influence of high rates on his home equity line of credit .

Borrowers can apply for cash-out refinance

If a borrower has a primary mortgage, he can replace it with a cash-out refinance loan and then pay off the credit line with the extra cash.

Example: A borrower's primary mortgage is worth $300,000 and the credit line is worth $40,000. So, he refinances the primary loan for $340,000. Thus, he gets excess cash of $40,000 with which he can pay off the line of credit.

At present the average rate on 30 year fixed mortgage is around 6.75%. So, if the primary mortgage rate is lower than it, one should think twice before he chooses to refinance. He can then choose any of the other options mentioned in the above post.

Thanks,

Caron.

Guest

It is always better if you can pay off your credit line as rates are going higher. But if you require flexible cash flow, you may keep it and instead pay down other debts so that your debt obligations are minimized to some extent.

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