Your Home Equity Mortgage Loan Could Use a Fix

By Gina Pogol
Mortgage Credit Problems Columnist

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If you have a home equity line of credit or home equity loan with an adjustable rate, consider fixing your rate and payment while rates are still low.

Many borrowers have home equity lines of credit (HELOCs) to consolidate debt and avoid bad credit. Others took out second mortgages to pay for medical emergencies, home improvements, or other large purchases. While using debt secured by your home is often the cheapest financing available, and far superior to credit card debt, you should keep an eye on your interest rate.

What Rate Do You Pay For Your Home Equity Line of Credit? Most HELOCs carry rates based on the prime rate and may change every month. If you have bad credit, the rate on your home equity loan could be several points higher than the prime rate, and you have little protection against rate and payment increases.

Can This Problem Be Fixed? Check your loan documents. Some HELOCs and ARM second mortgages allow you to fix your interest rate at one or more times during the life of the loan. If your loan features this option, consider exercising it before rates go up.

Other Options for Fixing a Bad Credit Home Equity Loan include wrapping the line of credit or second mortgage into a new first mortgage, or refinancing your ARM home equity loan or HELOC with a fixed rate second mortgage. Replacing your existing first and second mortgage with a new first mortgage makes sense if you can get a better rate and terms than you have now.

Check Your Documents. Home Equity lines often carry a penalty of about $500 if you pay them off within three years of the origination date. Terms for a bad credit home equity loan may be more restrictive than that. Check your loan documents before applying for a home equity refinance to avoid expensive surprises. If you have a penalty, check with your current lender. Some are willing to waive the penalty if you refinance through them.

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