Home equity lines of credit typically involve variable interest rates more often than fixed interest rates. If you currently have a variable rate and that rate is continuing to climb every year, and the current market interest rate is lower, it might be advantageous to refinance your house. If the difference between your current mortgage rate and what is available is approximately 2 percentage points, it may be to your advantage to refinance. You may want to think about it if the difference is 1.5 point or less.
The variable rate is based on a publicly available index (prime rate). The interest rate varies by mirroring fluctuations in the value of the index. Most lenders will cite the interest rate you will pay as the value of the index plus a margin (measured by percentage points). The margin can be a fraction of a percentage or whole percentages. It is important to determine the amount of the margin when figuring you credit line, as well as which index is used and how often the value of the index changes. By law, variable interest rate loans secured by dwellings must have a cap on how much your interest rate may increase over the life of the loan. Some may also limit how much your interest rate may fall if interest rates drop.
You should be sure to ask your lender if you will be subjected to an annual membership fee or maintenance fee. As many of us have learned from the ATM boom, it is a good idea to ask if there is a transaction fee each time you draw on the home equity line of credit.
Some lenders may allow you to change to a fixed rate during the life of the home equity line of credit.
Experts say you should have three to six months worth of living expenses set aside in a safe, easy-to-access account. As you evaluate this safety net do not overlook your homes equity. For this reason a home equity line of credit may be a great backup if you have an extended layoff or large unexpected expenses.
