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Published: Friday, 8/14/2009

Your Mortgage Questions Answered

Q. We want to open a $100,000 home equity line of credit to cover college costs for our daughters. Several banks in our area offered us a 4.5% variable-rate loan. Is this a good deal?

A. Home equity lines of credit (HELOCs) are great deals right now and at 4.5%, you re getting a very competitive rate. In addition, a line of credit usually costs little or nothing to open. HELOC terms are more flexible, too. You only have to pay back the interest on the money you use for the first few years, and that's a good option in these uncertain times. After seven to 10 years the line of credit would be closed and you would have to start repaying both principal and interest over the next several years.

Q.The HELOCs that were offered to us have variable rates. Would I be better off with a regular home equity loan that has a fixed rate?

A.The average cost of a home equity loan is well above 8%, so it would be far more costly than the HELOC you were offered. In addition, setting up a home equity loan carries many of the same costs of refinancing because you are getting a second mortgage.

HELOCs are always variable-rate loans, but we don't think the rate will go up significantly over the next couple of years. The Federal Reserve, which indirectly regulates HELOC rates with its rate cuts and increases, probably won t begin hiking rates again until the economy is on solid footing. At some point, if home equity loans become cheaper than HELOCs, you could refinance into a traditional equity loan. Meanwhile, you would have saved a lot of money.

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