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.