Lynn O'Shaughnessy

If you owe money on your home equity line of credit or if it feels like you have a gazillion payments left on an adjustable rate mortgage, you are probably feeling the pain of higher interest rates.

Perhaps you obtained your loan when lenders were bragging that rates hadn't been so low since the Cuban missile crisis. Unfortunately, the killjoys swept up the confetti many months ago.

Yet many homeowners are surprised at how quickly their once-great loan packages have turned into aching charley horses. Someone who snagged a home equity line of credit with a 4 percent interest rate in 2004 could now be making payments with a rate that's doubled.

Not surprisingly, interest in refinancing has dropped as the rate miasma has repelled shell-shocked homeowners. But bunkering down in your overpriced tract home and adopting an attitude of abject hopelessness won't necessarily be your best strategy. In some cases, you'll be able to shrink your monthly payments so that you'll be able to fill up the tank of your SUV.

This column provides strategies for those who have home equity lines; next time, I'll tackle the issue of refinancing a mortgage.

If you've got an out-of-control equity line, here's what you might want to do:

- Find a better home equity line of credit. Admittedly, many of you may rightly be perplexed about how you can locate a more attractive line of credit in this environment. These credit lines are tethered to the prime rate, which is currently at 8 percent. When the prime rate rises, financial institutions quickly tighten their customers' tourniquets. I wonder if some bankers must skip their morning detour to Starbucks to make sure the home-equity rate hikes are implemented before the next day's rush hour begins.

What distinguishes all these credit lines is each one's starting position. If you obtained a line of credit a while ago, your rate is probably tied to a formula that adds one or two percentage points to the base prime rate. So if your line of credit requires you to pay "prime plus one," your rate today would be 9 percent.

What is vastly preferable are credit lines that have positioned their starting gate farther back on the track. You should look for credit lines that offer a rate that remains a half or even three-quarters of a percentage point below the prime rate. To illustrate what a difference this can make, I plugged into a calculator a $75,000 balance that the owners aim to pay off in 10 years. If the line was shackled with a 9 percent interest rate, the monthly payments would be $950.07. But if the rate were 7.25 percent, the payments would drop to $880.51.

Lynn O'Shaughnessy

Lynn O'Shaughnessy is the author of Retirement Bible.

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