Is the interest rate on your home equity line getting ready to rise?

By Sheryl Landrum
Calculators for Mortgages Columnist

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After ten consecutive reductions in the prime rate, the Federal Reserve on June 28, 2008 decided to leave the prime rate where it was. However, with gas prices rising and inflationary pressures mounting, the Federal Reserve may soon need to raise the prime rate to control inflation. For those homeowners who have home equity lines of credit, you may need to review your home equity line interest rate and decide whether now is the time to "fix" it or risk a higher mortgage payment.   How Can Your Home Equity Line Interest Rate Be Fixed?
When the prime rate began to rise a few years ago, mortgage lenders began to see a huge decline in the amount of home equity line business as borrowers began to move to fixed rate home equity loans instead when purchasing or refinancing their home. In order to maintain customers, lenders began to offer borrowers the ability to fix the interest rate for a portion, or all, of the loan amount borrowed on their home equity lines. At about the same time, interest rates began falling and borrowers began to re-appreciate the effect of their variable rate home equity lines. As their payments became lower, many borrowers may have forgotten they have the ability to lock in their interest rates. Remember, if the prime rate begins to rise, so will those home equity line mortgage payments.  

How Much of an Effect Will a Rise in Interest Rates Create for Homeowners?
It is easy to go online and use a mortgage rate calculator to see the effect in an increase in interest rates. If you have a 100,000 home equity line currently at 5% interest, your monthly mortgage payment is $417 per month. Now, if interest rates rise by .25%, your mortgage calculator shows that your new monthly payment rises to $438, a 21$ a month increase. If the prime rate moves to 8.25% interest where it was before the Federal Reserve began to lower it, your mortgage loan calculator now reflects a monthly payment of $688--quite a substantial increase.  

Remember, if you refinanced or purchased a home using a home equity line of credit with a variable interest rate, most lenders offer borrowers three opportunities to fix the interest rates on their home equity lines of credit to current market rates. So, if your home equity line began at prime, plus 1%, your current mortgage interest rate on your home equity line is now 6%. If you began at prime, minus 1%, your current interest rate is 4%.  If you are worried that rates will start to move upward and you want to protect your current monthly payment against future interest rate increases, call your home equity line lender today and talk to them about fixing the interest on your home equity line mortgage.   



About the Author
Sheryl Landrum is a Loan Officer in San Diego, California and a freelance writer specializing in mortgage issues.