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?

There’s no right answer. Instead, the best answer often depends on the reason the borrower wants a second mortgage loan.

BankingMyWay puts it this way:

“An installment loan is best if you have a single, large need, like a home renovation, since you know the rate will not go up even if you stretch the payments over many years. The HELOC is best used as a back-up fund, to get you through short periods when expenses exceed income. Because the rate on your balance can rise, it’s best to use a HELOC sparingly, and to pay your balance off as fast as you can.”

HELOCs tend to have lower initial fees and lower rates than home equity loans. But, their rates are not fixed and the line can be reduced (as we’ve seen in current months).

For more considerations and a chart comparing the two options, see: HELOC vs. Home Equity Loan.

When a homeowner applies to refinance a property, he must first get permission from the second lien holder (i.e. the HELOC lender). In the past permission was taken for granted. But, due to troubled economic times, more banks are refusing permission or making additional requirements for borrowers.

ScrippsNews explains:

“A bank’s refusal to resubordinate can be costly to the homeowner. Caleb Shaffer has two mortgages on his duplex in Oakland, Calif. Both loans are with SunTrust. A credit union offered to refinance the primary mortgage at a lower rate, saving roughly $250 to $300 a month. Shaffer says he couldn’t go through with the refinance because SunTrust refused to resubordinate the second mortgage. SunTrust has received $5 billion in TARP funds from the federal government, or $34.13 for every working American.

Shaffer says he was told that he could refinance with SunTrust, but not with another lender. “They’re saying their policy is they don’t subordinate unless it’s within the family of SunTrust,” he says.”

If your HELOC lender is enforcing such policies, your refinancing options may be severely limited. If you’re considering refinancing in the future, think about applying now before more HELOC lenders adopt this method of securing your business indefinitely.

See Also:

Some HELOC Lenders Prohibiting First Mortgage Refinances

HELOC Freeze Help

I’ve put together a couple resources that can help you in your quest to find the best HELOC.

First, the article How to Negotiate the Best HELOC Terms, can help you know how to communicate with your bank. HELOC interest rates are not as straight forward as they may seem. When you understand how these rates are determined and adjusted, you’ll be prepared to ask for better terms.

After that, take a look at the printable HELOC Comparison Worksheet. Have a copy in front of you when discussing possible options with a HELOC lender on the phone or in person. You’ll know the most important questions to ask and will be able to compare multiple lenders by looking at just one piece of paper. Lenders can be a little tricky, so recording their estimates from the beginning is a smart idea.

In the end, you’re the one who has to do all the hard work. No one can tell you what lender is best for your situation. Anyone who says “this bank always has the best rates and terms” can’t possibly know that. Loan products change regularly, interest rates are all over the place, and brokers are often willing to negotiate to give you a better deal. So, read up on what to look for, print of the worksheet, and hit the phones. Your hard work will pay off in savings and peace of mind.