Home equity line of credit may need help as rate rise

Last year’s low interest loan is this year’s high interest home equity line of credit

The home equity line of credit is a useful financial tool. Unlike other loans, such as a credit card loan, the rates are affordable. The loan is flexible; you have a set limit and you can borrow repeatedly against it. As a bonus, the interest is tax deductible. All in all, it’s a great thing to have, as a credit line represents a great opportunity to have cash at the ready should disaster strike unexpectedly.

Those are all good things, but there is a downside to the line of credit that you won’t find with a traditional, fixed-rate loan: the interest rate is adjustable. That wasn’t a problem three or four years ago, when interest rates were the lowest they had been since the 1960’s. But rates are rising again, and if you have had a credit line for a few years and you have an outstanding balance of more than a few hundred dollars, you now have a loan that may be growing more expensive by the day.

There are some solutions to this problem; all you have to do is find one that works for you. Here are a few possible answers to the rising interest rates that may plague your home equity line of credit:

• Look around for a better rate - It’s true that most lines of credit are tied to the Prime rate, and that isn’t likely to vary from lender to lender. Some lenders, however, will offer better rates to borrowers that have better credit scores. If your score is a healthy one, you may find some benefit in calling a number of lenders and seeing if they can offer you a better deal than the one you have. It may be worth your while; as rates rise, demand falls off and lenders have more free time (and fewer customers) than they have had in a while. If they are eager to get your business, they will let you know.
• Find a better feature set - Some lines of credit allow you to turn the adjustable rate line of credit to one with a fixed rate. Not all lenders offer this, but it is worth asking about, particularly if you are already on the phone trying to get a better rate. Just tell them about your current situation and mention that you would like to do better. All kinds of things are possible.
• Get rid of the credit line - You can simply do away with the line of credit altogether by refinancing your home and rolling the old loan into the new one. This may not be a good idea, particularly if your primary mortgage is one with a low fixed rate. If you have a fixed-rate mortgage at 5%, for instance, you probably wouldn’t benefit from doing this. Others might, however.

The key to ridding yourself of a loan with a rate that is climbing is to get on the phone and see if you can do better. You might be surprised.