Home Equity Line of Credit - Do Rising Interest Rates Spell Trouble?

Summary: A home equity line of credit is a useful tool, but one that is adversely affected by rising interest rates. If you have one, what should you do?

A home equity line of credit is one of the most useful tools that a homeowner can have in his or her financial arsenal. A line of credit is a financial tool that is always there, allowing a homeowner to borrow money when needed for such emergencies as job loss or illness. It also comes in handy for financing any one of a number of things, with home improvement probably topping the list of most common uses. Unlike a traditional home equity loan, which has a repayment schedule consisting of a fixed amount of money to be paid on a set schedule, the line of credit is quite flexible. Once approved, the borrower decides when, or if, to borrow the money and how much to borrow. The payment schedule is more flexible, too, working more like a credit card bill than a mortgage payment. The downside of a line of credit when compared to a home equity loan is the adjustable interest rate. With a line of credit, the rate can vary over time and it can rise and fall with the vicissitudes of the financial market. If a borrower happens to have a large balance on his or her account and market interest rates go up, so will the amount owed. With rates having gone up steadily for the past two years, many consumers are probably wondering if continuing to keep a home equity line of credit is a good idea. It may or may not be, depending on the borrower's individual situation. If the credit line has little or no outstanding balance, and the purpose of having the line in the first place is to have a source of emergency funds, then keeping the account makes perfect sense. It's there when needed and if it isn't used very much then the rising interest rates will have little effect. On the other hand, if the purpose of opening the account was to finance a large home improvement project with a cost of tens of thousands of dollars, the borrower benefits tremendously by taking out a traditional home equity loan with a fixed interest rate and repayment schedule. For some, the rising interest rates, along with the corresponding larger monthly payments, will be more of a factor in their lives than the convenience of having a line of credit at hand. For others, the security of knowing that emergency sources of cash are available whenever they are needed is paramount. Ultimately, it's all a matter of individual need. As interest rates are still pretty low by historical standards, most home equity borrowers will be find no matter which choice they make