If you have a home equity line of credit, maybe you wonder what to do with it. Should you keep the credit line, even though the rate has almost doubled in 21 months? Should you refinance it? To answer, you will have to make a judgment call and probably do some math.
Two years ago, a home equity line of credit looked like a great deal. Credit lines gave homeowners access to money at rates that were lower than those on fixed-rate home equity loans or first-lien mortgages. Cheap credit lines allowed borrowers to use their homes as ATMs to pay for home improvements, college tuition, cars and vacations.

But credit lines are indexed to the prime rate, and that means that borrowers' minimum monthly payments go up whenever the Federal Reserve raises short-term rates. The Fed has done so 15 times since the middle of 2004, raising the prime rate from 4 percent to 7.75 percent. Most observers expect the Fed to hike at least once more.

Monthly payment nearly doubles
The increases have hit consumers' checkbooks hard.

Take the hypothetical example of someone who borrowed $30,000 against a home equity credit line when the rate was 4 percent. Two years later, the same borrower still owes $30,000 because she has made only the minimum payments, which cover interest and not principal.

Now that the rate is 7.75 percent, the minimum monthly payment has risen from $100 to $193.75.

Credit lines are no longer the great deals they once were. The average rate on a credit line is now higher than the average fixed-rate home equity loan. And 30-year, fixed-rate mortgages are even lower.

Three choices
Borrowers have three options:

Keep the credit line.

Pay it off and replace it with a fixed-rate home equity loan.

Do a cash-out refinance on the first-lien mortgage and pay off the credit line with the proceeds.

Holding the (credit) line
A credit line has two advantages, says Michael Moskowitz, president of Equity Now, a mortgage lender in New York: It grants you flexibility, and you pay interest on the amount owed and nothing more. If those qualities are important, you might want to keep the credit line.

The archetypical user of a home equity line of credit, Moskowitz says (and, yes, he uses the word "archetypical"), is a self-employed homeowner "whose business goes up and down and they want to have in reserve a couple of hundred thousand dollars." The ready reserve of money helps smooth out the times when not a lot of money is flowing in.

That archetype has expanded to include people who need to borrow money periodically, using their house like a credit card -- homeowners who renovate their homes in stages, for example, or parents who pay tuition. For these people, the flexibility of a credit line outweighs the rising interest rate.

Ideally, these borrowers draw from their credit lines and then pay some or all of the balance before drawing against the credit line again. Using a credit line this way is cheaper than using a credit card, and the interest is tax-deductible.

"If they're not fully drawn out, and expect money to go in and out, they keep a home equity line of credit even though rates will keep going up," Moskowitz says.

On the other hand, someone who carries a balance on a credit line might want to embrace the discipline of being forced to pay it off, even if it's at a higher rate.

Refinancing into a fixed loan
If you can stand the higher payments, it might make sense to refinance the credit line into a fixed-rate home equity loan, says Anthony LaGiglia, a financial planner with J.J. Burns & Co. in Melville, N.Y. Right now, rates on home equity loans are roughly the same as those on home equity lines of credit. But home equity loans sport higher payments because the minimum payment includes interest and principal, and not just interest.

Take that hypothetical homeowner who still owes $30,000 on a line of credit and pays $193.75 a month just for interest. If she converts it into a home equity loan at 7.75 percent -- one that pays off the loan balance in 15 years -- the monthly payment rises to $282.38. The payment is higher, but the loan eventually will get paid off.

That borrower could simply keep her line of credit and pay the higher amount every month, but there are two problems with that. First, she might not have the self-discipline to keep doing it. Second, the credit line's interest rate is likely to rise even more (and later, to fall). The home equity loan, in contrast, has a fixed rate, so the monthly payments remain the same for the life of the loan.

Cash-out refinancing
The other way to handle a line of credit is to pay it off with a cash-out refi. That's when you refinance your first-lien mortgage for more than you currently owe, take the difference in cash and use that money to pay off the home equity line of credit.

Paul and Lisa Boucher are going the cash-out-refi route. The couple and their three children own a house south of Provo, Utah. When they got their home equity line of credit to finish the basement, the interest rate was 5.25 percent. Now it's almost 10 percent. But that's not their main worry. Their primary home loan is a payment-option adjustable-rate mortgage, in which the interest rate has risen from 5.75 to 6.5 percent since July. It probably will rise more.

So they're refinancing -- switching the first mortgage to a 30-year fixed, probably at 5.5 percent after paying discount points. They'll borrow more than they owe on the payment-option ARM and use the money to pay off the $2,000 in debt remaining on the line of credit.

Why not keep the line of credit, for flexibility?

"I'd guess I'd rather not have temptation in front of me," Paul Boucher says. "Our basement is done, our yard is done, and I guess we kind of ..." He pauses, at a momentary loss for words. "We're fortunate because we have no credit card debt."

Removing easy credit temptation
Their only debt will be a car loan and a house payment, and that's the way they like it. "We just said we're going to do cash all along, as much as we can. The boat and WaveRunners -- we're just going to have to pay with cash or do without. I really believe those home equity lines are such a trap."

The Bouchers are lucky -- they're refinancing their primary mortgage at a lower rate. Not everyone is so fortunate.

"Unfortunately, the window has closed for some people," LaGiglia says. Specifically, those who got mortgages at something like 5.5 percent. Rates are so much higher now that it doesn't make sense for these people to do a cash-out refi. As LaGiglia says, giving up a lower rate for a higher rate "is a losing proposition."

Those people will have to keep their current lines of credit or refinance them into equity loans. "The best thing you can do," LaGiglia says, "is take out that scratch pad and look at the options. I don't think refinancing that 5.5 percent first mortgage is the way to go."