Home equity loans and credit line choices

We have written quite a bit about how useful it is to have a home equity line of credit. Once approved for a line of credit, a homeowner may borrow money a bit at a time of all of it at once. Unlike a traditional home equity loan, which has a set rate of interest, a fixed amount taken out and a fixed payment schedule, a line of credit provides much greater flexibility. If you don't care to take out any money at all, you you have that option, too. By taking out the cash only when you need it, a home equity line of credit makes a terrific catastrophe fund. The interest rates are adjustable, and the payment plan is revolving, much like paying off a credit card balance.

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With rates of interest rising, a home equity credit line does not look so affordable. What should you do if you have a credit line as interest rates are rising? A line borrowed three years ago now has recurring payments that are double what they were and those rates and payments are expected to keep rising down the road.

You have a number of options:

• Convert to a fixed-rate loan - Converting to a fixed-rate loan will cost you flexibility, but you will have the peace of mind that comes from knowing that you have a fixed payment each month until your loan balance is paid off. You could contact your loan company and see about converting your credit line to a fixed-rate loan.

• Keep the credit line - If you are only keeping the line of credit for emergency use and don't have a balance, you might wish to just keep it and not worry about it. You could take no action and just accept that rates are higher and regard that a cost of having a credit line. If you maintain a small balance, you might just want to reduce it and put the line aside for a while. A line of credit is still a very useful monetary tool, even if it is more expensive than a few years ago.
• Refinance the entire home - This may be a great time to do a cash-out refinancing if your house is financed with an adjustable rate mortgage and you would like to turn it to a fixed-rate mortgage. It is still possible to just refinance the entire house with cash-out financing. With cash-out refinancing , you take out new financing for the mortgage value plus the amount that you owe on the credit line, after which you can repay the line of credit with the extra cash. You could, in effect, do two things at once by refinancing both your first and second mortgages at one time.
• Get "convertible" financing - Some lenders offer the option to convert all or a portion of your balance to a fixed-rate loan. The terms for this type of financing will vary by lender, but you should inquire about it.

Every consumer will have his own special needs, so there is no single secret that works for everyone. If you have questions about what you should or should not do with your financing, check with your lender.