While You Were Sleeping, Your HELOC Increased By 3.25 Percent

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I've had this exact conversation way too many times:

Me: "Home Equity Lines of Credit are not fixed interest rate.  Your cost of borrowing on a HELOC is a lot higher now than it was 18 months ago."

Homeowner: "No, my HELOC is at a great rate."

Me: "Oh, okay!  What's the rate on your HELOC?"

Homeowner: "Something like 4 per cent!"

And I get sick to my stomach.  Three thoughts quickly flood my head:

1. Did you know that your HELOC is adjustable?
2. Did you know that your rate has adjusted 13 times?
3. Did you know your rate is on your monthly statement?

And so I educate:

Me: "You know, a HELOC is like a credit card and the rates change every time the Fed changes rates."

Homeowner: "Oh, I know!  But rates haven't really moved much."

Me: "Well, you're right.  Long-term mortgage rates haven't moved much, but short-term rates are up more than three per cent in a year-and-a-half."

It starts to dawn:

Me: "So, your rate was 4% when you started your HELOC?"

Homeowner: "Yeah, that sounds right."

Me: "Okay, so if your rate was 4 percent, now it's 7.25%."

Homeowner: [Silence]

Many people "forget" that their home equity lines of credit are adjustable and just make their payments each month.  But HELOCs are tied to Prime Rate and look at what Prime Rate has done since June 2004 (when it was 4.000%):

• June 30, 2004: Prime Rate increases to 4.25%
• August 10, 2004: Prime Rate increases to 4.50%
• September 21, 2004: Prime Rate increases to 4.75%
• November 10, 2004: Prime Rate increases to 5.00%
• December 14, 2004: Prime Rate increases to 5.25%
• February 2, 2005: Prime Rate increases to 5.50%
• March 22, 2005: Prime Rate increases to 5.75%
• May 3, 2005: Prime Rate increases to 6.00%
• June 30, 2005: Prime Rate increases to 6.25%
• August 9, 2005: Prime Rate increases to 6.50%
• September 20, 2005: Prime Rate increases to 6.75%
• November 1, 2005: Prime Rate increases to 7.00%
• December 13, 2005: Prime Rate increases to 7.25%

If you have a HELOC, check your last monthly statement to verify your current rate.  If the rate on your second mortgage is higher than the rate on your first mortgage, consider calling your loan officer for a new mortgage strategy.

The moral is this: Mortgage financing is not a One-and-Done arrangement. 

It is imperative to treat your mortgage(s) like any other investment and give it constant care and attention to make sure you are maximizing your returns.  If you're not paying attention, you could be wasting a lot of dollars in interest each month.