Anyone who got a home equity line of credit in the last year has enjoyed low interest rates from the start. Now that's going to change.
Most home equity loans carry a variable interest rate linked to the prime rate, which had lingered at a comfortable 8.25 percent from early 1996 until last week, when it rose to 8.5 percent.If, as many analysts expect, the Federal Reserve raises short-term rates again in the next few months, banks are sure to spike up the prime rate again, somewhere between a quarter point and a half point.
The best home equity lines of credit charge interest just below prime or at prime, but those good rates are not available everywhere. More typical is an interest rate of prime plus one point. In other words, if the prime rate is at 8.25 percent, you pay interest of 9.25 percent.
With a $50,000 line of credit at 9.25 percent simple interest, you would pay $4,625 a year in interest, or about $385 a month. When the rate rises to 9.5 percent, you pay just $10 a month more, about $395. But another half point jump to 10 percent would take the monthly payment to $416 - up $31 a month over current charges.
What are your options? For many people, the higher payments won't be a big problem since the rise in monthly payments is relatively modest. But if those higher payments will squeeze your budget, you might see if your line carries an interest-only option. That would allow you to stop paying on principal and lower the payments.
You also could convert the equity line to a standard second mort-gage, which would have a fixed rate substantially below 10 percent, but probably would carry closing costs.
- It will be difficult to find a 30-year fixed rate mortgage below 8 percent in coming weeks. The national average rose from 7.97 percent to 8.18 percent the week of April 3, according to a weekly survey by Freddie Mac, a big secondary mortgage company.
That's the highest rate for the 30-year mortgage since last September, when rates were 8.28 percent, Freddie Mac said.
If you're in the market for a house, let's hope you locked in your rate before the latest rise. Remember that not long ago - in late February - you could still find mortgages for an average of 7.5 percent.
The difference in monthly payments between 8.18 percent and 7.5 percent is $56 on a $130,000 mortgage - $970 a month vs. $914.