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The benefit of the home equity loan Closing costs lower than for refinancing


Rising interest rates, reflecting worries about inflation, may force into action homeowners who have held off refinancing mortgages in hopes of catching the low point of the interest-rate cycle. One idea to consider is replacing a conventional mortgage with a fixed-rate home-equity loan. This could allow a borrower to lock in some of the best rates in two decades while saving a few thousand dollars in closing costs.

xTC "It's a good way to trade in higher interest-rate debt for lower-cost debt with limited out-of-pocket expenses," said Keith Gumbinger of HSH Associates, a mortgage information service in Butler, N.J. The typical cost of refinancing a mortgage is about $3,500, Mr. Gumbinger said.

Many banks offer fixed-rate home equity loans at rates almost as low as mortgages -- but without the usual fees. The reason is intense competition fueled partly by sluggish demand for other types of loans. Costs for the average home equity loan last year were $362, according to the Consumer Bankers Association. But many banks waived most or all fees.

A drawback for some is that home equity loans are usually for a maximum of 15 years, compared with a 30-year conventional mortgage. But current low rates allow some borrowers to cut their monthly payment even while paying off a home loan twice as fast. Say you're paying 12.75 percent on a $100,000conventional mortgage taken out 10 years ago. Refinance at the current rate of 7.75 percent with a 15-year home equity loan and you'll cut your payments by about $200 a month.

In considering whether a home-equity loan will save you money over a standard mortgage refinancing, compare overall costs of the two over the same period, Mr. Gumbinger advises. A $50,000, 15-year fixed mortgage at 7.36 percent, with no points, costs $460 a month. For a 15-year home equity loan, the cost at 7.75 percent would be $471 a month.

The home equity loan would cost $1,980 more over the loan term, so you'd have to save at least this much in closing costs to make it a better deal.

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