Long-term interest rates present a real conundrum here.    10-year rates have fallen from 3.05% to as low as 2.35% over the last six months.   Fears of a global recession and Brexit uncertainty have caused money to pour into the US and to drive down what are still comparatively high US rates.   Barring a global recession, it does seems that long-term interest rates should move higher as the Fed reduces its portfolio and as the risks in the US deficit and debt come to the fore. 

Doubleline’s Jeffrey Gundlach made a compelling case for higher long-term rates on CNBC this past week.

Gundlach's view prompted an interesting discussions on CNBC's Options Action, one of the very few shows on CNBC that is actually worth watching.   Mike Khouw and Dan Nathan suggested that a trading opportunity exists in the market’s complacency. Interestingly, Carter Worth, one of the traders, and many others, still believe that the 10-year goes to 2.00% here.  

I wouldn't advise betting through market instrumnets one way on another on the direction of interest rates here.   But, I’d heed the advice of Gundlach and others not to become too complacent about lower rates.  Therefore, if you are thinking about remortgaging or locking in a home equity loan, this is as good of a time as any to take action.

For many years, we have written about appropriate and inappropriate reasons to have a home equity line of credit.   In particular, home equity lines of credit can be used to consolidate more expensive debt (credit card, education loans, etc.) and can be used by consumers to even out irregular cash flow.   We’ve even cited cases where the affluent can use home equity lines to their advantage.

Drawing on your home equity line jeopardizes your home if you cannot service the loan and repay the principal.   Therefore it is not without risk.

From the news this week, we have an example of a case where one really shouldn’t be drawing on their home equity line.   To be clear, nobody should be drawing on their home equity line in order to pay hush money to an adult film actress just before a Presidential Election to enable the Russians to complete their goal of electing a pawn as the U.S. President.   Michael Cohen has set a precedent that we do not recommend you follow.

I have plenty of friends who have paid off their mortgages and loans as soon as they came into money, and vowed, ever since, never to take out another loan in their lives.

While that sentiment may bode well for those of extraordinary net worth, it overlooks the value that home equity lines of credit can provide to those of more ordinary means (normal folk and even the merely wealthy) in their financial planning.

Basics of Home Equity Lines of Credit

Let’s examine the basics of home equity lines of credit first in order to understand what makes them appealing.  First, home equity lines of credit are typically less costly and more flexible than home equity loans.   Importantly, as the borrower, you only borrow the amount that you need, and thus you only pay interest on the amount that you need and draw.  And, while the payback schedule, therefore, is highly flexible, the amortization schedule ordinarily does not require payback of the principal drawn until year 10.   In other words, the home equity lines of credit are interest only loans for the first 10 years.

Typically, lenders will lend from $200,000 up to $500,000.   

Key Advantages for the Affluent

Since you pay interest only as you go and on what you draw out over the first 10 years, the affluent, particularly those who are self-employed, can use a home equity line of credit to float day-to-day expenses.  According to Janis Bronstein, a Vice President at FM Home Loans, a Hamptons, NY-based mortgage brokerage, home equity can even out uneven expenses and provide a bridge for other purposes, such as home improvements or auto purchases.   If you qualify, you can even use a home equity line of credit to finance the purchase of another home while you are trying to sell your current home. To do this you need to meet the debt to income ratio guidelines and down payment guidelines set forth by the new mortgagor.

The new mortgagor will base their calculations for qualifying based on the assumption that your line of credit is fully drawn.

Pricing and Qualification

The pricing of a home equity line of credit varies from lender to lender.  You can see the pricing offered by some lenders here.  In general, it is important to understand that the rate of a home equity loan is based on the prime lending rate (“prime”) which is the rate that commercial banks charge their most creditworthy customers.  Most lenders add on a margin above the prime rate, and the home equity line, of course, is dependent on your credit score falling within certain parameters and the loan-to-value of what you are financing.

When determining whether you qualify for a home equity line of credit, lenders usually assume that the prime lending rate moves 2% higher than it is on the pricing date (or higher) and look at your ability, based on your cash flow, to pay back the loan with principal amortization over a 20-year term.  They perform this stress test to be sure you will have the ability to meet the loan even with fluctuations of prime and a shorter repayment period that might be stated in the loan. 

Some Possible Disadvantages

Ms. Bronstein also points out that while home equity loans are generally more flexible and cheaper than home equity loans and less burdensome than credit cards, they do bear risks and disadvantages.

One real risk in a home equity loan is found in the fact that repayment terms are tied to the prime lending rate fluctuates, and may fluctuate greatly.  The prime lending rate is more likely to inch up, as opposed to down, over the next few years, as the Federal Reserve raises the Fed Funds rate.

Consumers, therefore, should also analyze whether it makes more sense than a cash-out mortgage refinance.  For example, with prime right now at 4.25%, the BestCashCow mortgage refinance tables show a 30-year fixed rate of 3.75% on the date of this publication.  That rate and that product may make more sense for a borrower who is going to keep the cash out for a lengthy period.  However, some borrowers intending to keep cash out and attracted to the lower rates may will still find home equity lines of credit to be the product of choice, as they can often go up to 90% of the value of the property against which they are issued, and avoid the need for private mortgage insurance (PMI).

See the best home equity line of credit rates where you live here.

Every day, about 10,000 baby boomers turn 65, the “traditional” age for retirement – or at least, the age when many people decide to call it quits and leave their jobs. In years past, many retirees could count on a workplace pension combined with Social Security benefits and personal savings to help them afford their retirement as long as they had modest financial needs.

But today, that's all changed; Social Security has not been keeping pace with withdrawal demands and inflation, the lion's share of businesses no longer offer employee pensions, and the stock market volatility of a few years ago all but wiped out the personal retirement savings of millions of men and women nearing or already at retirement age. Add to that the longer life expectancy for both men and women and it's easy to see why so many men and women are worried about having enough money to afford to live during their retirement years. In fact, numerous studies have shown just how woefully unprepared most people are when they reach their retirement years with the average retirement savings hovering well under $100,000. What is a retiree to do?

Home Equity: An Overlooked Resource

By the time retirement has arrived, most men and women have built up considerable equity in their homes – equity that can provide a much-needed financial cushion and extra peace of mind. Although home equity is one commodity shared by the majority of baby boomers, it's often overlooked as a source of funds for retirees. At least part of that is due to the fact that home equity loans are most commonly marketed as loans for life expenses like weddings, college education or home improvements, and not viewed as traditional vehicles for helping to offset some of the expenses of retirement. That view has begun to change more recently as older Americans are more commonly including their home's equity in their retirement planning.

If you have equity in your home, there are two primary ways to unlock it: Consider downsizing to a smaller home now that your children are grown and on their own, or take out a home equity loan (HEL) or home equity line of credit (HELOC). Downsizing can free up cash when you sell your current home and purchase a less expensive home in return. But a recent survey by AARP found most retirees – about 90 percent of those surveyed – don't care to downsize; they want to remain in their homes as they get older, which makes home equity loans an especially attractive option. The primary difference between the two options is how the money is disbursed. A HEL gives you your money in a lump sum while a HELOC lets you draw from a line of credit as you need it. Not only can a HEL or HELOC help you handle the costs of retirement, it can also help fund improvements and modifications to your home that allow you to stay put as you get older.

Is a HEL or HELOC right for you?

If you're retired or you're planning on retiring soon, now is a great time to explore home equity loans.

Rates remain near historic lows, which means this is the ideal time to lock in a great rate. You've invested a lot in your home. Take a few moments right now to review our rate tables to compare all your options and see just how easy it can be for your home to start paying you back for a change.

Every year, homeowners take out billions of dollars in home equity loans and equity lines of credit – and why not? Home equity loans are a great way to tap into the value of your home so you can afford some of life's major expenses, like a home upgrade or remodel, college tuition or a wedding. Many people use home equity loans to consolidate high-interest debts like credit cards and unsecured personal loans. But before you start filling out applications, there are a few things you should do to ensure you're positioned to get the best loan at the best rate possible. Read on to see what you should be doing right now to get the most from your loan:

First, check your credit. If you're applying for a home equity loan - or any type of loan or credit - the first thing you should do is check your credit report. Your credit report is used to determine your credit score – and your score, in turn, can determine whether or not you qualify for a loan. Federal law entitles you to a free credit report every 12 months from each of the three major credit reporting agencies – TransUnion, Experian and Equifax. All you have to do to request yours is to go to a free credit report site (like AnnualCreditReport.com) and download them. Once you have your copies, review them carefully, looking for any errors. Even minor errors may have an impact on your credit score, so be vigilant in your review. If you find an error in the way an account is reported – for instance, incorrect reporting of a late payment or collections report – be sure to contact the creditor immediately to request a correction.

Next, take some time to boost your credit score. Your credit score is based on the information in your credit report. That means that in addition to correcting errors, there are some other things you should be doing to make your report - and your score - as positive as possible. Ideally, you'll begin repairing your credit a few months before you apply for a loan, but even if you only have a month or so, you can still boost your score by a couple points with just a few changes in your buying behavior. Make sure you pay all your bills on time, and if you're over your limit or concerned you'll be late on a payment, call your creditor to let them know and make arrangements so it doesn't appear as a late payment. If you can, pay down the balances on your credit cards; if you're at or near your limits, your credit score will suffer. Ideally, you want to be below 20 percent of a card's limits, but if that's not doable, any decrease in your outstanding balance can help boost your score. Most importantly, if you carry a large balance, avoid using your card during the loan process – and don't take out any new lines of credit until after you receive your loan proceeds.

While you're improving your credit report and score, you should also be improving your home to make sure your home appraises for its full value. Why? Because the appraisal of your home's value will play a big role in determining the size of your home equity loan and the amount of equity you can tap into. It just makes sense to ensure your home looks its best when the appraiser comes to call. Of course, if you're taking out a home equity loan, chances are you don't have a lot of money to spend on major home improvements. But the good news is, you don't have to sink a lot of money into your home to impress your appraiser. Simple things like washing woodwork and walls, deep-cleaning your rooms, renting a carpet cleaning machine, putting some potted plants on your front porch and making sure minor repairs are made can help your home make the best impression during your appraisal.

And finally, know how much money you really need. When interest rates are low or your appraisal is high, it's tempting to take out a loan that's far in excess of what you really need. That can mean you wind up overextending yourself and getting in over your head when it comes time to make payments. To make sure you don't wind up in financial hot water, make a plan for how you're going to use your loan proceeds, including how much you really need to meet those goals – and then stick with it. That means if you're intending to use your loan to pay for tuition, avoid the temptation to slip in a vacation – even if you feel it's well-deserved. Having a plan and knowing your limits are two important steps in responsible – and smart – borrowing.

That's it – four simple steps are all it takes to make sure your home equity loan process is as rewarding and stress-free as possible. Take a few moments right now to get started, and soon you'll be on your way to making your financial dreams and goals come true.

See the best home equity rates where you live.