Home equity line of credit makes less sense as rates rise

You may wish to consider other options instead of a home equity line of credit

The lending industry is a flexible one; there is no right or wrong loan product at any given point in time. Each person has different needs, and the vicissitudes of the market make a product that is a great one today a lousy one tomorrow. Fortunately, lenders offer a wide variety of types of loans to suit all people and most situations. If you have a loan that no longer suits you, you can probably exchange it for one that works better for you.

So it is with the home equity line of credit. This type of loan, also known as HELOC, is a flexible financial tool that offers you a revolving line of credit against which you can draw funds as needed using a debit card or a checkbook. A HELOC is great for recurring expenses, such as tuition, ongoing expenses, such as a do it yourself home remodeling project, or great to have in case of emergency. You never know when you might need a sudden source of cash, and a HELOC is perfect for that, as you don’t make any payments unless you actually withdraw money.

But a line of credit, unlike a home equity loan, has a variable interest rate, and interest rates are rising. This makes a HELOC somewhat less appealing than it was before. For some people with large outstanding balances, the increase in interest rates means substantial increases in their payments. For them, a line of credit may not be as useful to them as they were a few years ago when rates were lower.

What are your options of you currently have a HELOC and are concerned about rising interest rates?

• Keep it your line of credit - You will have to pay more, but the advantages of a line of credit are numerous. Just be more judicious in how you use the funds and be aware that your payments will be higher.
• Swap it - Get a fixed-rate home equity loan. You will now have regular payments at a fixed amount via a fixed interest rate. The downside is that once you pay it off, your loan is gone. You cannot borrow again, as with a HELOC.
• Refinance your home loan and roll the line of credit into it - Take out a new mortgage for the amount of the mortgage balance plus the amount you owe on the HELOC. Instead of two payments each month, you will just have one. Again, you lose the ability to continue to borrow against the credit line; you will have to take out another home equity loan if you have such needs in the future.

Everyone has different finances and everyone has different needs. What works for someone else may not work for you. If you are not sure what you should do about your line of credit and whether increases in interest rates will adversely affect you, talk to a lender. He or she can examine your finances and discuss with you whether or not you will benefit from exchanging your HELOC for some other type of financing.