For a small number of homeowners, the mortgage crisis has created the “perfect storm”: rates have dropped significantly but their HELOC limits have stayed the same. For those who have a home equity line of credit with a limit exceeding the principle owed on their original home loan, it can be tempting to pay of the first loan with the second.

If you’re one of the lucky few in this situation, don’t be too hasty to switch to a lower rate. Paying off your original home loan with a HELOC can be quite risky.

Jack Guttentag for Inman News Service explains:

“A reader with a HELOC who wrote me recently had a margin of minus 0.75 percent, which made her rate 2.5 percent. Her first mortgage had a rate of 6.5 percent, and her HELOC lender offered to increase her line by enough to pay off the first mortgage. The prospect of converting a 6.5 percent loan into a 2.5 percent loan was indeed enticing.

Nonetheless, I advised against it. The reason is that she did not expect to pay off the loan for 15 years, and over that long a period, the risk from the HELOC is too high.

The prime rate is extremely volatile. In 1980, it jumped from 13.5 percent to 21.5 percent in two months! This was an unusual episode, to be sure, but unusual episodes are becoming commonplace these days.”

By shortening your repayment period and converting a fixed rate to an adjustable rate, you’re opening yourself to the some serious potential problems.

See Also:

Answers to Common HELOC Questions

Is a HELOC Right for You?

Tags | Heloc, home equity line of credit, mortgage, mortgage rates, second mortgage