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Lines of credit have been big business for banks and credit unions lately.

With interest rates starting at 3.250 percent, it's easy to get sold on bank-issued credit lines for financing renovations around the house or paying down debt.

But before you rush to open that credit line, remember that lines of credit are variable-rate products and that they're based on something called "Prime Rate".  As far as variables go in the mortgage world, Prime Rate is among the least stable.

Prime Rate is a derivative interest rate, equal to the Fed Funds Rate plus 3 percent.  Prime Rate rises and falls with the health of the U.S. economy -- just like the Fed Funds Rate does.  And this is why home equity lines of credit are priced so perfectly right now.

The Fed Funds Rate and, therefore, Prime Rate, is as low as it's been in history.  It doesn't take an elephant's memory, though, to remember that Prime Rate was 8 percent-plus just 2 years ago.

A few years before that, Prime Rate neared 10 percent.

These are the facts that the banks and credit unions aren't selling. Instead, they're dangling low "start rates" as bait and waiting for homeowners to bite.

In fairness, the credit lines are actually a good deal -- where else can you borrow money for 3.250 percent?  Long-term, however, the good deal can turn bad.  If you the loan's not paid by by the time the economy starts to recover, that 3.250 percent rate will climb and the math will fall out of favor.

We're on the precipice of that recovery now.

So, for most people, getting cash via a cash-out refinance is the more prudent, long-term alternative versus opening a fresh line of credit.

A cash-out refinance is when you refinance to a larger loan size and keep the difference as cash.  You can use the money for home repairs, for debt repayments, for college tuition, or just for safe-keeping.  It's a lot of the same reasons why you'd want a line of credit, actually.

The biggest difference is that you can lock up a mortgage rate for 30 years at today's pricing.

Both paths have pros and cons.  There are specific reasons to take a HELOC just as there are reasons to go cash out.   Just remember that banks and credit unions aren't selling 3.250 percent, per se -- they're selling "Prime Rate" and Prime Rate is variable.

If you're unsure of whether HELOCs or cash-out refinances are best for you, or want to know today's available rates, call or . We can talk about your situation and find a plan that works.

As home values stagnate around the country, mortgage lenders are actively trimming their exposure to home equity.  Until recently, they've done it one of two ways:

1. They eliminated no downpayment loans (except in rare circumstances)
2. They capped second mortgages (i.e. home equity loans) at 95% of the home's value

But now, there's a third way. 

To reduce exposure to the national housing market, banks are now shutting down idle home equity lines of credit on their books.  The letter above arrived in my mailbox, for example, a few weeks back. 

A HELOC is the ultimate emergency fund for a homeowner and a receiving a letter like this makes it look like the bank is doing you a favor.  It's not.

For homeowners, a home equity line of credit can be smart addition to a short- and long-term financial plan.

• It's instant access to your home's equity
• There's no payments unless you're using it
• The interest rates can be up to 15 percent lower than on credit cards

Because of these traits, home equity lines of credit are the perfect tool for when a life throws you a curveball -- and life always does. 

After all, when you need money, nobody wants to lend it to you.  Banks don't like the idea of loans to people in crisis.  Banks prefer lending to "good risks".

As an insurance policy of sorts, a HELOC is really your "loan in advance"; it's money set aside and available to you for when you need it most.  And, until recently, once you had a home equity line of credit in place, nobody was taking it away from you. 

That's all changing now.  Let's look at the letter line-by-line:

• Lines 1-2: You have a HELOC and aren't using it
• Lines 3-4: We'll waive your early exit penalty if you close your HELOC now
• Lines 4-6: Closing your HELOC will lower your total debt load with credit agencies
• Lines 7-8: We'll make it easy -- do nothing and we'll close your HELOC for you
• Lines 8-12: To keep your HELOC open, write a letter and mail it to us

The letter from the lender above is sinister, in some respects. 

First, a layperson would infer from Lines 4-6 that his credit score would improve if the HELOC is shut down.  That's not true. 

Second, the lender is closing the HELOC by default, requiring the homeowner to handwrite a letter, stamp it, and mail it in order to keep the credit line open.  There was no pre-addressed return envelope in the original letter.   

The lender misdirects the homeowner and then creates hoops for him to jump through.

Mortgage lenders are sending letters like this one to homeowners around the country.  If you get one, take the time to write the lender back.  Leave your inactive HELOC open and available for emergencies. 

In the current lending climate, it's a lot easier to keep your existing HELOC than it is to get a new one.

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.