Time to Convert the Home Equity Line?
November 09, 2007
Rate shoppers who are looking to convert their home equity loans to a fixed-rate second mortgages have been disappointed with the rate quotes and fees associated with a second mortgage. In many cases, homeowners have stopped shopping for the second mortgage and been happy to maintain a line of credit in order to have the more attractive rate. However, beyond just comparing the two APRs homeowners may want to consider the lower monthly payments and peace-of-mind (about future upward rate shocks) if they were to go ahead and lock-in at these historically low fixed mortgage rates.
Lines of credit vs. traditional second mortgage loans
If you are thinking about a home equity line of credit, you might also want to consider a traditional second mortgage loan. A second mortgage provides you with a fixed amount of money repayable over a fixed period. In most cases the payment schedule calls for equal payments that will pay off the entire loan within the loan period. You might consider a second mortgage instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.
In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at both the APR and other charges. Do not, however, simply compare the APRs, because the APRs on the two types of loans are figured differently:
The APR for a traditional second mortgage loan takes into account the interest rate charged plus points and other finance charges.
The APR for a home equity line of credit is based on the periodic interest rate alone. It does not include points or other charges.
source: Federalreserve.gov
