Your HELOC Might Get Some Relief
Today’s Wiki Wednesday Feature: Home Equity Loans and Lines
On Tuesday, the Federal Reserve delivered an emergency rate cut in an attempt to spur the economy and to try to steer clear of a full-out recession. So, what does that mean for homeowners? Well, if you’re like most Americans who own a home, you might have a home equity line of credit (HELOC) or a home equity loan. These two similar-sounding loan types — lines and loans — are also known as second mortgages and could benefit the most from the rate cut, although adjustable-rate mortgages that are re-setting soon may benefit as well.
To help tie-in the Fed’s move with our Wiki Wednesday feature, let’s review the difference between a line of credit and a home equity loan:
A line allows you to borrow money up to a certain amount of money and it’s usually tied to the prime rate. Think of it as having a credit card with a spending limit that you can draw on whenever you need to. For example: A borrower might obtain a $75,000 HELOC at “prime plus one.” This means that the interest rate is one percentage point higher than the prime rate. If prime is 5.5%, then the HELOC is 6.5%. So, since the Fed cut rates, this will affect your HELOC interest rate and you could see a difference as soon as the next one or two billing cycles.
A home equity loan is when a lender gives you a set amount of money and you pay it back over a fixed payment schedule. Typically these loans have fixed interest rates, so they will not be affected by the rate cut.
Another good breakdown of how the Fed’s rate cuts affect consumers across the board is outlined in the Wall Street Journal. And, one last plug: For daily doses of straight-up mortgage advice I like to turn to Rhonda Porter and Brian Brady. Or, if you have a favorite mortgage blogger that is helping to make sense out of this topsy-turvy subprime world, please leave a comment.
Ed: Wiki Wednesdays is a weekly feature that highlights helpful or interesting articles from the Real Estate Guide.
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