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?

The Chicago Tribune reports:

“Find out if your second lender will subordinate to your first lender. If you have a first and a second mortgage (also known as a home equity loan), find out whether the second lender will subordinate to the new first lender. That will allow you to refinance your first mortgage, while leaving your second loan in place. Many second lenders will not agree to this, and if yours doesn’t, you may not be able to refinance at all unless you pay off the second loan.”

In past years, HELOC lenders almost always agreed to subordination. But, now that foreclosure rates are so high, many are trying to force potential refinancers to pay back their second mortgages early.

See Also:

HELOC Questions and Answers

In order to change the original loan, you need to get permission from the secondary lien holder (your HELOC lender). Before the credit crisis this was pretty much never an issue. But now some HELOC lenders are declining permission, with the hopes that borrowers will close their lines of credit in order to refinance.

Permission is less likely to be granted if your the value of home’s in your neighborhood have significantly declined or if the lender identifies you as a high-risk borrower. If this happens to you, you’ll have to decide which is more important: refinancing at a lower rate or holding

CNN Money reports:

“HELOCs can be hard to get right now, but they are cheaper than doing a complete refinance. Recently, the average rate on a HELOC was 5.73%, a point lower than the new jumbo loans. What’s more, HELOC generally have no upfront fees. The rub is that HELOCs are adjustable, but with the economy looking sluggish it’s a good bet interest rates won’t rise soon.”

If you qualify to take out a home equity line and you live in an area that is not experiencing dramatic property value drops, it’s worth looking in to.

HELOCs have great rates now. But there are more stable options such as the fixed-rate home equity loan.

See Also:

Is a HELOC Right for You?

Current HELOC Prime Rate