Home Equity Line of Credit Costs Soar

It was always so easy and inexpensive to obtain. A home equity line of credit, that is. More and more borrowers looked to these resources over the years due to their low interest rates. But times have chamged.

What had been a bargain two years ago can be a burden today. Consider: The monthly interest payment on a Florida home loan of this nature of $50,000 has more than doubled in two years, to more than $333. That’s a pain in the bank account.

What is a HELOC?

A HELOC is a credit that can be drawn from - and typically act as - interest-only loans with terms of five to 25 years, after which the principal must be repaid. Interest is tied to the prime rate, which banks charge their best customers, which has soared since June 2004, to 8.25 percent from just 4 percent.

The ease of obtaining a HELOC makes them very tempting.

“It means mostly just walking down to the bank and asking for one,” says Keith Gumbinger, vice president of vice president at HSH Associates, a publisher of consumer loan information.

Not all Florida home equity lines are bad, of course. The interest deductible and these loans can be used to retire more expensive debt.

“If you’re doing it to pay off expensive credit card debt, or for needed home improvement or to pay for education, there’s nothing wrong with that. But many people are using it for day-to-day expenses. For them, the danger is they’ve been given a new tool - for digging themselves a deeper hole.”

Making use of a home equity line of credit

In some high-priced housing markets, according to Ted Gross, a director of the National Association of Mortgage Brokers, people used HELOCs to afford pricey homes instead of regular Florida home loans.

“A lot of people took out HELOCs because it’s the only way banks would allow them to purchase with less than 20 percent down,” says Ellen Bitton, CEO of Park Avenue Mortgage Group.

She explains that some banks would extend a conventional Florida mortgage loan for only 80 percent of the purchase price. So borrowers had to come up with the rest as cash down payments. The bank would extend a HELOC, therefore, which was backed by the equity of the home, for all or a portion of that down payment.

Other borrowers, says Bitton, used HELOCs simply because the loans were so cheap. “Many people who bought property a few years ago thought, ‘Rates are so low, I’ll just [buy it with] a Heloc.’ Now they’re going to pay for it.”

What to do about your HELOC

So, how can borrowers get out of a Heloc hole? Here are some suggestions:

Prepay the Florida home loan. If they have the cash, they could pay off the loan immediately. If it’s less than three years since taking out the loan, however, they would probably incur a penalty of between $350 and $500. That’s probably worth it, especially for a large loan.

Take a cash-out refi. Refinance the primary mortgage and pay back the full amount of the HELOC.

Rates are a couple of points lower on a 30-year fixed rate today than on a HELOC. Application fees, title search and insurance and other expenses will increase the total debt but monthly payments may still be lower than the blended total of the old primary mortgage and the HELOC. Plus, with a fixed rate Florida home loan, borrowers know exactly what their payments will be.

Switch to a fixed rate home equity loan. Unlike HELOCs, Florida home equity loans are usually fixed-rate loans. They don’t cost as much as a mortgage refinancing to execute, but there still are some closing costs. Plus interest rates run a point or so higher than for 30-year, fixed rate mortgages, but that’s still a savings compared with HELOCs.

Be aware of all options. Let us know what other questions come to mind as you attempt to see which Florida home loan refinancing options would save you the most time/money.