Time to Rediscover the Home Equity Loan

NEW YORK (TheStreet) -- With all the focus on record low mortgage rates, another falling rate has received little attention: the enticing rate on home equity loans. These are the best deals they've been in years.

This week the rate on the fixed-rate five-year home equity installment loan fell to 5.4%, compared with 5.8% a week earlier, according to the Bankingmyway.com survey. Rates were around 8.5% as the financial crisis raged in 2009.

The Federal Reserve's low-rate policy and investors' demand for debt securities have driven home equity rates down the same as the have for mortgage rates.

Home equity rates are usually higher than mortgage rates because home equity loans are riskier for lenders. In a foreclosure, a home equity lender gets paid only after the mortgage lender recoups all it is owed, and often the home's sale does not produce enough for both.

Many homeowners, of course, cannot get a home equity loan today because the plunge of home prices during the crisis left them with no equity to borrow against. Others simply cannot meet lenders tough standards. But if you need some cash and can get a home equity loan, should you?

Many homeowners opt instead to refinance their first mortgages. After all, why take out a home equity loan at 5.4% if you can get a 30-year mortgage for 3.4%? Long-term homeowners with lots of equity can refinance for more they owe on the old mortgage and use the extra cash just as they would a home equity loan, but at a lower rate. For these homeowners, the home equity loan is an also-ran.

But now that home prices are rising, people who have already refinanced a first mortgage when they didn't need that extra cash may find the home equity loan is the best way to deal with a new cash need. Their choice is to refinance again, using the new equity to take out a larger loan then they need to pay off the old mortgage, or to leave the low-rate mortgage in place and add a home equity loan.

This second option offers a key benefit -- lower fees. While it could cost thousands to refinance a mortgage, a home-equity loan might cost only a few hundred. With the Mortgage Loan Calculator you can compare the monthly payments on the two loans. Click "View Report" to see the interest charges on the two loans, then figure how long it will take for the higher interest charges on the home equity loan to equal the extra fees you'd pay on the mortgage refinance -- the break-even point. If you'd have the home equity loan for a short period -- shorter than the breakeven point -- it will be the cheaper option. If you'd have it longer than that, a refinance would be cheaper.

Of course, if your needs are really short term -- a year or two or less -- then you might go with a variable-rate home-equity line of credit, or HELOC. Many of these loans now start at only 3% or 3.5%, and they charge very low fees -- even less than on fixed-rate home equity installment loans.

The catch: after a few months the HELOC rate starts to float every month, and you can expect it to go pretty quickly to 5% or 6%, depending on your credit rating. In the future it could go higher, so HELOCs are for borrowers able to pay off the balance quickly if rates jump.