Mortgage rates witness a lot of fluctuation going up one day and come crashing down the other. However the principal or the prime rate that forms the basis of interest you pay for getting a home equity line of credit (HELOC) is comparatively more transparent. Read more!
The Federal Reserve reaches its economic targets by establishing both short-term rates that indirectly impact the prime rates. When the rates are raised, the prime rate immediately responds, but such is not the case for mortgage rate. With two raises and the third planned raise, the rates for getting a home equity line of credit all set to increase.
When you apply for a home equity line of credit, you are charged the prime rate plus a markup margin added by the lender. For example, on the prime rate of 3.75% if the lender adds 2%, your total interest rate will be 5.75%. This margin varies from one lender to the other.
Experts believe that most certainly the prime rates will witness an increase in the near future. The low interest have held on for long enough and it is about time that the customers refinanced their home equity lines of credit for bad credit into a loan that has fixed rate.
Getting a home equity line of credit is still cheap. And customers who have used their home equity lines of credit for bad credit on home improvement still have some leeway before the plans get changed owing to increased rates. But for those borrowers, who still have a lot of balance to be repaid, need quickly changeover to the fixed rate option keeping track of the prime rates.
It has been observed that the customers avail of the best home equity lines of credit and use them to refinance their first lien mortgage. This is primarily because HELOC usually do not have associated closing costs, but there are lenders that may charge you origination costs. Refinancing the first lien with a HELOC with no closing costs is popular among borrowers as they anyway did not plan to live in their home for a long duration. And, now with the prime rates beginning to increase, such borrowers are already making a shift to fixed rate loans.
Many banks are assisting borrowers convert to fixed rate loans by charging a slice of variable rate. It is prudent that you shift over to the fixed rate loans before it is too late.