Home equity line of credit: in a rising interest rate
This September, the interest rates on home equity line of credit observed
a new high; consequently a lot of home owners who were enjoying
rock bottom introductory interest rates, till a few months back
are now paying interest in double digits. The overall interest
rates in the financial market have gone up noticeably over the
last few months. And home owners, whose introductory rates expired,
landed up with much higher interest rates and the monthly payments
also took an unpleasant turn. To avoid landing up in troubled
waters with your home equity line of credit, while it still
time, you could start considering the option of replacing it
with the home equity loan.
Quite often home equity line of credit may have some payment penalties associated, so you could be charged a heavy fee for paying off your balance too early. But most likely, the savings that you will be making by switching over to a lower fixed rate of interest will easily offset the penalty charges. If your line of credit entails the prepayment penalties, get down to calculations to see how much you will be charged and then compare it with the amount that you would be saving.
For instance, let us assume that your outstanding balance is around $30,000, and the current interest rate charged on the line of credit is 14 percent and the prepayment penalty is $500. By shifting onto a home equity loan, your interest rates will come down to around nine percent; consequently you will end up saving nearly $800 within the very first year. This implies that you will not only be able to cover up the prepayment penalty cost, but will also save a good amount of money.
You can further make the deal rewarding for yourself, by negotiating with your home equity loan lender, as they are often ready to waive off certain fees to get business from you. And even minor reductions in the closing costs can bring about significant amount of savings and that is exactly what any homeowner would be interested in.
When you plan to get rid of your high interest home equity line of credit, you can do it in either of the following two ways:
1. Converting a line of credit into a home equity
It is interesting to learn, that while the interest rates on home equity
line of credit are rising steeply, the interest rates on
home equity loans are still around the historic lows. Borrowers
are flocking to take
advantage of these interest rates by transforming their line
of credit into a fixed rate home equity loan. Currently, the
interest rates on line of credit are in two digits and quite
close to the interest rates on credit cards, while the interest
rates on home equity loans are still below ten. A few years
back many homeowners got home equity line of credit accounts
setup because of the interesting introductory rates that were
being offered. But as of today when their introductory period
is either over or is about to expire, the other side of the
coin seems too harsh, as the sudden change in the interest rate
has jolted their household finances.
The only solution to this dilemma lies in converting the home equity line of credit into a fixed rate home equity loan which is also referred to as a second mortgage sometimes. When you go around shopping for a home equity loan, use the free quotes, that are provided by brokers and financing companies, to make a price comparison. Theres a lot of competition among lenders, and most of them will show a willingness to make adjustments just to increase their business. Understand about all the costs, get all the details from the lenders and proceed further only when youre totally convinced with a specific lender. When your decision is final, dont forget to lock in the interest rates.
Getting on to a home equity loan will take away all your worries related to interest rate fluctuations, because you will enjoy a fixed rate of interest throughout the entire life of your loan.
2. Using a Cash-out Refinance to pay off your home
equity line of credit:
With the recent upturn in the traditionally stable prime interest rate, the interest rates on home equity line of credit has also taken a hostile turn, while the home mortgages and refinance programs have not got affected much. Even though an adjustable rate mortgage is also on an adjustable rate like the home equity line of credit, but the adjustable rate mortgage remains a much safer financial alternatives because there are caps set on the interest rate which prevent it from rising beyond a certain limit. These limits prevent the borrower from facing absurdly high rate of interest on their mortgage program, however there is no such guarantee on a line of credit.
Most financial experts, taking a look at the current scenario, advice homeowners to take the fixed rate cash out refinance to get some relief. Here are some benefits of transforming your short term debts into a fixed rate mortgage:
• Lower monthly payments: since this transformation will get you want to lower interest rates your monthly payments will definitely shows some decrease. However, when youre looking forward to a significant decrease in the bill, you can take a refinance for a longer term. This is specially a great idea when you are facing some short term financial problem.
• Low volatility: Cash out refinance allows you to lock in the interest rate and become immune to the fluctuations in the prime rate as against a home equity line of credit.
• If you want to pay up all your loans early, then you can go in for a refinance program for a shorter duration. You can increase your monthly payments so that more amount of money goes towards payment of the principal.
Taking cash out refinance to pay off your home equity line of credit seems
to be a realistic decision you can make, to get rid of your
financial problems because of the increase in the prime rate.
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