Home equity line of credit choices

Unlike a typical second mortgage, which has a set rate of interest, a fixed amount taken out and a set repayment schedule, a home equity credit line offers much greater versatility. Once approved for a home equity line of credit, a homeowner may take a little at a time of all of it at one time. We have written quite a bit about how smart it is to have a home equity line of credit. By taking out the cash only when necessary, a line of credit makes a great emergency fund. The rates are variable, and the payment plan is flexible, much like repaying a credit card balance. If you don't want to take out any money now, you can do that, too.

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What should you do if you have a home equity credit line as rates of interest are rising? With interest rates going up, a credit line doesn't look so reasonable. A line taken out three years ago now has monthly payments that are twice what they used to be and those interest rates and payments are expected to keep rising down the road.

You have several options:


Get a "convertible" home equity credit line - The terms for this type of credit line will vary by lender, but you should ask about it. A few lenders offer a line of credit that lets you convert all or part of your outstanding balance to a fixed-interest equity loan.
 

Refinance the entire house - It is still possible to simply refinance the entire house with a cash-out refinancing. You could, in effect, kill two birds with one stone by refinancing both your first and second home loans at once. This may be an excellent time to do a cash-out refinancing if your home is paid for with an adjustable rate mortgage and you would like to convert it to a fixed rate loan. With a cash-out refinancing loan, you take out a new loan for the remaining balance plus the amount that you owe on the credit line, after which you can pay off the credit line with the extra cash.

Keep it - This is a very useful financial tool, even if it costs more than an it used to be. If you have a small balance, you may just want to reduce it and put your loan aside for some time. If you are merely hanging on it for emergency use and don't have a balance, you may wish to simply hang on to it and not worry about it. You could do nothing and just accept that rates are higher and consider that a cost of convenience.

Turn it into a fixed-rate loan - You could contact your loan company and see about converting to a fixed-rate home equity loan. Converting to a fixed-interest equity loan will cost you versatility, but you will have the peace of mind that comes from knowing that you have a fixed monthly payment until your loan is repaid.

Each homeowner will have her own particular needs, so there is no single solution that works for everybody. If you have concerns about what you should or shouldn't do , speak with your lender.