Chances are, if you have a home equity line of credit, you've been getting pinched this year by federal rate hikes and that financially stinging sensation will continue right through the holidays.

Considering the extra cost, with more likely to come, it's a good time to reexamine your home equity loan and consider your alternatives.

Most (78 percent) home equity line of credit (HELOC) rates are based on the Wall Street Journal prime rate, according to the Consumer Bankers Association's 2004 Home Equity Loan Study, released earlier this month.

The WSJ prime rate -- a consensus prime rate based on the prime rate offered by 75 percent of the nation's 30 largest banks -- is the most widely quoted prime rate and it has changed four times this year.

The prime rate is the rate at which lenders will lend money to its best (most creditworthy) corporate customers and it's the index used by lenders to set rates on many consumers loans, including the popular HELOCs. HELOCs also come with a spread or margin that pushes the actual rate higher than prime.

The prime rate moves in tandem with the Federal Reserve's benchmark federal funds rate, the interest rate at which banks and other depository institutions lend money to each other, usually on an overnight basis.

The Fed has raised the federal funds rate four times this year, one quarter point each time, in June, August, September and just last week, Nov. 10, pushing the rate to 2 percent.

Likewise, the WSJ prime rate has followed in lock-step rising from 4 percent in June (the lowest level since 1958) to 5 percent this month.

The WSJ prime is still well below the peak 9.5 percent level reached in early 2001. That was just before the Fed began to aggressively reduce rates to deal with the deflating stock market bubble and the 2001 recession led by the dot com bust in the large technology-driven sector.

The popularity of the HELOC, with it's prime rate index, means more home owners are feeling the crunch.

Use of the HELOC rose 77 percent during the first half of 2004, according to the Mortgage Bankers Association of America. It also said the average credit line increased from $71,932 at the beginning of the year to $83,630 by July. The average initial balance on the line at settlement rose to $45,884 at mid-year, up from $42,523 at the beginning of the year.

The Consumer Bankers Association says about half (48 percent) of home equity lines of credit change whenever the prime rate changes, while others are adjusted on a monthly basis.

Most borrowers holding prime rate indexed HELOCs have to dig deeper within one or two billing cycles, following a federal rate hike and subsequent increase in the prime rate.

The association says the average amount outstanding on HELOCs nationwide was about $36,000 as of June 30, 2004 and with each one quarter percentage point increase in the prime rate, the increase on the monthly payment on that balance is about $7.50 per month or at least $30 so far this year.

Keep in mind, the monthly payment increase is exponentially larger with larger balances -- like those in high home cost areas where homeowners have more equity and acquire larger equity loans.

You can stop the march of higher monthly payments by locking in your HELOC with a fixed-rate home equity loan -- and a gamble.

"It depends on the product and particular balance, but a lot of the banks will let you switch to a fixed rate that right now will be higher, typically 2 percent higher than the current variable rate," said Fritz Elmendorf, an association spokesman.

That's a move to take if you anticipate rates will continue to climb. How high and how fast rates will rise are tough to predict, but the switch will give you peace-of-mind and protection from substantial or prolonged rate increases, Elmendorf said.

You can take the same lock-in approach by refinancing to combine both your first home loan and your equity loan into a single first home loan at today's still relatively low fixed interest rates for first mortgages.

You'll have to calculate the cost of the refinancing and subsequent new payment and compare it with current and projected costs for your two old mortgages, in both cases based on how long you plan to stay in the home. Again, the calculations require some crystal ball gazing.

Finally, you could also sell your home, buy a cheaper one and pocket the difference -- especially if you are an empty-nester, nearing a move-down period in your life or can otherwise live comfortably with a smaller home.

This final strategy assumes after paying off the two mortgages and moving down, you'll have any cash out you need or will otherwise be ahead of the game, financially.

Unfortunately, as is the case with your other two choices, crunching numbers here also is an inexact science.

Published: November 16, 2004

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.