By now, most people have heard that the Federal Reserve has “paused” its relentless interest rate increases after seventeen consecutive quarter-point hikes.

The pause is generally seen as a temporary “wait and see” step and that a resumption of rate increases is a definite, perhaps likely, possibility.

Still, the announced pause is an action warmly welcomed by HELOC borrowers who have seen average rates on their loans rise from the 4.50% range to nearly 8.75% over the course of the Fed’s rate hikes. Most HELOCs are indexed to the prime rate which moves lock-step with Fed rate changes.

But the news may get even better for HELOC users. According to a report in the Wall Street Journal (August 9, 2006), the historical record shows that when the Fed “pauses” in a rising rate environment, it has signaled a rate peak. The Journal’s James B. Stewart reports:

“I was curious to see just when the Fed last paused in a rate-raising campaign, in the sense that it stopped increasing rates for one or more meetings, and then resumed. I looked at every Fed rate decision since 1914, and guess what? The Fed has never paused in a campaign to raise rates. Sometimes it has held rates constant for several meetings, but the next move has always been a cut.”

Of course, there’s always a first time. But HELOC users who’ve been spent most of the last two years strategizing ways to lock in rates on their loan balances may want to carefully consider whether holdin on to their variable rate HELOC may be the smarter move at this juncture.

Technorati Tags: Federal Reserve, Fed’s rate hike, Fed

We came across this post about Possible Dangers in Home Equity Loans which puts an interesting twist on the potential emerging “perfect storm” of high HELOC utilization, rising interest rates, and dropping home prices.

For borrowers, the combination of these factors is a recipe for major financial stress. Add in two more factors and the potential for a real calamity becomes clear:

1. many mortgages and home equity loans - especially those processed during the housing boom - are based on inflated appraisals, meaning some of the borrowed equity never really existed; and

2. “home equity” is the main retirement savings account for milions of Americans, accounting for 1/3 to 1/2 of the average baby-boomer’s total wealth.

So, where’s the silver lining in this cloud? Well, mortgage pros are eyeing another round of refinancings (this time not to buy a 60″ flat screen but to save the homestead) and the windfall in fees and closing costs that will acompany the rush:

This type of build-up of financial burdens on homeowners brings about a perfect opportunity to cash in on the increasing need to refinance to keep their mortgage payments under control. According to Brad Brunts, with Citi Mortgage, these changes will bring him more business, “It offers an opportunity.”

Strange how things work.

HELOC loans remain a viable and extremely useful personal finance tool if used prudently. But, unfortunately for many borrowers who weren’t careful, a painful reckoning may be coming.

Technorati Tags: HELOC, home equity loans, home equity, personal finance