Home >> Learning Center >> Resource Center

Resource Center: Ask Pinnacle

There are two key characteristics of home equity lines of credit that are resulting in higher payments: their interest rates are variable, and they are interest-only loans, which means the interest rate is tied to the prime rate and the only required payment each month is the interest payment.

With short-term interest rates on the rise, people with adjustable interest rates are the ones feeling the greatest impact of the Federal Reserve's rate increases over the last year. A 4.0 percent home equity line of credit that closed at the beginning of 2004 is now at about 5.5 percent. On a $100,000 balance, the payment increase is $125 per month.

Refinance?

Because of the low interest rate environment we have been in for the past two years, home equity lines of credit have become increasingly popular as sources of financing for home improvements, paying off credit card debt and financing cars, boats, etc. Many home equity line of credit users are currently considering moving their balances to other financing options with fixed-rates, such as refinancing their homes and rolling their equity line balance into their mortgage. If peace of mind is your top priority, this would be a viable option. If paying the least possible amount in interest is your priority, look at your balances and interest rates before making a decision. If your mortgage has a much higher balance than the home equity line (i.e., $300,000 on a 30-year mortgage and $25,000 on the equity line), you might end up paying a significantly larger amount in interest by consolidating the $25,000 home equity line of credit into your 30-year fixed rate mortgage. Would it be less expensive to pay off the $25,000 home equity line over the next five years, even if the rate goes to 8 percent, for instance?

For people with adjustable rate mortgages, there are even more factors to be weighed in deciding whether to refinance with a fixed rate mortgage. These include your tolerance for risk and uncertainty, the rate, the length of the loan, the caps for interest rate increases, the length of time you expect to carry the mortgage (i.e., whether you will move before the loan is due) and the amount of the closing costs for refinancing.

We can be pretty certain short-term rates will continue to move upward as the Federal Reserve tries to curb inflation and stimulate the economy. With that in mind, make sure you and your financial advisor are looking at all the variables and options as you make financial decisions.

Questions about home equity lines of credit or mortgage financing? Contact Ross Kinney at Ross.Kinney@pnfp.com or by phone at 744-3781.

Return to the Resource Center Home Page