Can You Keep Your Home Equity Line of Credit?

[Jan 13, 2009.]

 

With mortgage rates at all time lows, many consumers are researching their refinance options. Those who have started the application process are likely to run into problems related to credit scores or home values.

Fannie Mae and Freddie Mac have implemented risk-based pricing tied to credit scores and home equity that have pushed rates and fees higher for most borrowers with credit scores falling under a 740 threshold or for those with less than 20 percent equity.

For those who are still able to obtain rates more favorable than what they already have, the question often arises over what to do with existing home equity lines of credit. When the decision is made to keep an existing home equity line of credit in tact, the bank or lending institution that services the home equity line of credit must agree to subordinate the lien to the new primary mortgage.

If the institution servicing the home equity line of credit is unwilling to subordinate the lien, either the home equity line of credit must be paid off and closed or the refinance of the primary mortgage will not be permitted.

The equity line of credit can be paid off in one of several ways.  The homeowner can pay off the existing balance with cash they have on hand, from the proceeds of a larger primary mortgage (e.g. combine the 1st and 2nd mortgage), or from the proceeds from a new home equity line of credit with an institution willing to subordinate the lien.

Homeowners should also evaluate their plans to payoff an existing home equity line of credit. Even though many borrowers have home equity lines of credit at rates below what is available with current 30 Year Fixed mortgages, those rates are variable and will inevitably start to increase. Homeowners unable to payoff their existing home equity debt in the near future should explore rolling that debt into a fixed rate mortgage that will protect them from future interest rate increases.

 

About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.