Home equity loans and a HELOC

Once authorized for a credit line, a homeowner may borrow a little at a time of all of it at once. Unlike a traditional second mortgage, which has a set rate, a set amount taken out and a fixed payment plan, a credit line offers much greater flexibility. We have written extensively about how smart it is to have a home equity line of credit. If you don't want to take out any money at all, you can do that, as well. The rates are adjustable or variable, and the payment plan is revolving, much like repaying a credit card balance. By receiving the money only when you need it, a line of credit makes a superb catastrophe fund.

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With rates rising, a credit line doesn't look so good. What should you do if you have a home equity credit line as rates of interest are climbing? A credit line borrowed three years ago now has recurring payments that are twice what they were and those rates and payments are likely to keep rising in the future.

You have some choices:

• Get a "convertible" home equity credit line - The terms for such a credit line will vary by lender, but you should ask about it. A few mortgage companies provide a credit line that lets you convert all or a portion of your balance to a fixed-interest loan.

• Keep the credit line - A credit line remains a very useful financial tool, even if it is more expensive than an it used to be. If you have a small balance, you might just want to pay it down and put the credit line to the side for a while. You could take no action and simply accept that rates are higher and consider that a cost of convenience. If you are only keeping the credit line for rainy day use and don't carry a balance, you may wish to simply keep it and not worry about it.
• Refinance the whole mortgage - You might, in effect, kill two birds with one stone by refinancing both your first and second mortgages at once. This may be a great time to do a cash-out refinancing if your home is paid for with a variable interest rate mortgage and you would like to turn it into one with a fixed rate. With a cash-out refinancing, you take out new financing for the remaining balance plus the amount that you owe on the line of credit, after which you can repay the credit line with the extra money. It is still possible to simply refinance the entire home with a cash-out refinancing.
• Convert to a traditional second mortgage - Converting to a fixed-rate will cost you flexibility, but you will have the security that comes from knowing that you have a fixed monthly outlay until your balance is paid off. You could contact your lender and see about converting your line of credit to a fixed-rate home.

Each borrower will have his or her own particular needs, so there is no single solution that works for everyone. If you have doubts about what you should or should not do with your credit line, consult with your lender.