Refinancing your line of credit could save you hundreds of dollars a year in interest.
Despite this year's run-up in the prime rate - the index to which most home-equity lines of credit are tied - from 6 percent to 7.25 percent, the average rate for home-equity lines was recently only 7.6 percent.If you already have a home-equity line of credit, that average may sound suspiciously low. That's because it reflects deeply discounted introductory rates.
But while competition has kept the hike in starter rates on home-equity lines to less than half a percentage point, borrowers with existing lines have absorbed the full impact of the 1.25-percentage-point prime-rate increase.
Most home-equity lines carry a fully indexed interest rate "margin" of one to three percentage points above prime. That means the older loans carry rates of 8.25 percent to 10.25 percent, depending on their margin.
You may profit from refinancing, especially if you can find a line with a slimmer margin from a lender willing to absorb some or all of the closing costs.
Say you're paying prime plus three points on a typical, $25,000 home-equity line of credit. In the Atlanta area, for example, First Union National Bank's most popular line waives closing costs and carries a rate of prime plus two points - and for the first six months, the rate is one point below prime.
By refinancing, you'd save $493 in the first six months and $247 per year after that.
The bank offers an option of a margin only one point above prime if the borrower pays closing costs, but few borrowers choose to pay the $800 to $1,400 because it would take four or five years just to recover the up-front cost.
Watch for competition to heat up even further as national lenders become players in what has so far been mostly a local game.
Prudential Savings (800-426-4331) already markets loans nationwide, including a line of credit indexed to the prime rate for which you pay all closing costs.
Countrywide Funding (800-669-6659), a California-based behemoth of home-purchase mortgages, is turning its sights on home-equity lines of credit: The company plans to offer home-equity lines in about 30 states starting in September.