Now that HELOC rates are so low, many homeowners are tempted to pay off their original home loans with home equity. While this strategy may seem like a smart move at first glance, there are some serious risks.

Banking My Way explains:

“…There is a serious problem — because HELOC rates are variable, you can’t be sure the savings will last. The loan that charges 4 percent today might charge 6, 7 or 8 percent sometime later.

Many HELOCS figure monthly adjustments by adding a fixed “margin” to the prime rate. With today’s prime at around 3.25 percent, a HELOC with a 3.5 percent margin would charge 6.75 percent. You’d probably do better refinancing with a fixed-rate mortgage at around 5 percent.”

When your HELOC rate adjusts (as it almost inevitably will), you may be faced with payments even greater than your current bills. Best bet: refinance if you need a lower rate. The HELOC simply wasn’t designed for this kind of maneuver.

See Also:

Is a HELOC Right for You?

Tags | Heloc, home equity line of credit, refinancing