Can you believe the Fed has raised the short-term rates 17 times in just the last two years? The good news today was that the central bank decided today to keep the target for the federal funds rate at 2.25 percent and prime rate at 4.25%. Lynn Reaser, chief economist for the Investment Strategies Group at Bank of America, expected the pause in rate hikes "because of the fact that interest rates are approaching the higher end of what may be called a normal range, and in view of the slowing in the economy, which is expected to ultimately dampen inflationary forces." However, Reaser says it's too soon to predict whether interest rates have reached their peak for this cycle.
Your home equity line of credit (HELOC) is an adjustable rate loan, similar to other adjustable rate mortgages (ARMs). However, changes in the market affect your HELOC a lot faster than standard ARMs because interest on a HELOC is calculated daily rather than monthly as it is with standard ARMs. Thus, if the prime rate adjusts higher at the end of the month, your HELOC rate goes up the very next day. Also, HELOCs have no adjustment caps, which limit the size of any rate change. Fixed-rate loans, on the other hand, don't carry any risk of rate hikes and adjustment caps because the interest rate stays fixed through the life of the loan.
If your equity line of credit payment continues to go up, it may be a good idea to refinance into a fixed-rate second mortgage, especially if the interest rates on your existing first mortgage are good. Although there is a pause in the interest rate hikes now, inflation continues to rise, which may mean the feds continue to raise the prime rate, and your payment rises again. "If I don't see some moderation in inflation, it's going to be very hard to argue that we can pause again," said John Silvia, chief economist at Wachovia Economics Group.
Some home equity lines of credit can convert into fixed-rate equity loans at the time of a drawing. If you have this option, you should speak with your lender about converting your HELOC to a fixed-rate loan. Otherwise, see your lender about refinancing your HELOC into a fixed-rate second mortgage.
Maria Ny is an acclaimed free-lance writer who has published many mortgage related articles. Get more info at BD Nationwide Mortgage for Mortgage Refinance Loans. For more 2nd mortgage advice & home equity refinancing tips, visit Equity Loans and Refinance Second Mortgage programs.