Home Equity Borrowers Getting a Break

The prime rate is at its lowest level since 1955, and home equity borrowers are reaping the rewards.

Nothing's better than a gift from an unexpected source. You probably weren't expecting to benefit in any way from this sour economy.  But, if you owe money on your home equity line of credit (HELOC), a surprise may be on its way.

A break when you need it

In December of 2008, the prime rate fell to 3.25 percent, a full 4 percentage points lower than it was a year earlier. If that doesn't impress you, consider this: the prime rate back in December of 1980 was 21 percent- 17.75 percentage points higher than today's rate.  

If you owe money on a HELOC, this historically low prime rate could be an economic gift of exceptional timing. Because most home equity rates are tied to the prime, you're likely to see your monthly interest costs decline during the next several weeks. The 4 percent rate change over the past year represents monthly savings of about $83 for every $25,000 of outstanding debt.

You'll have to check your HELOC documentation, however, to verify where your rate will fall. Home equity rates are typically structured as prime plus a fixed margin. The margin is determined by your credit qualifications, and can be a positive or negative number. If you have a negative margin, you might be flirting with an interest rate floor-the lowest minimum rate allowed on your line.

Let's say, for example, that your HELOC is priced at prime minus 0.50 percent, and the fine print in your documentation establishes a rate floor of 3 percent. At today's rate, prime minus 0.50 percent would be 2.75 percent. But here, the fine print wins out. Your rate will stop its downward slide at 3 percent, no matter how far prime falls.

Acting on home equity rates

A lower rate automatically saves you money on your interest costs, but you can also use it to help you pay down debt faster. In this economy, both are worthy causes. If you can afford it, consider increasing your monthly payment. Reducing your balance now sets you up for interest savings later; home equity rates will eventually go back up, and you'll want your balance to be as low as possible when that happens.

You might also consider using the home equity line to consolidate higher-rate debts. According to IndexCreditCards.com, the average consumer credit card rate as of January 5 is 14.32 percent. If you have revolving credit card balances, now may be the time to move them to your home equity line. Just don't go overboard; limit these transfers to amounts you can pay off in the next 12 months. Otherwise, the strategy could backfire when prime goes up again.

The gift of lower home equity rates won't last forever. Use it to your advantage, before things go the other way.