LOCK in your loan?

IF YOU HAVE a home-equity line of credit with a variable rate, you may feel as if you're being slowly tortured on the rack by small but painful turns of the interest-rate wheel. Most lines of credit ate tied to the prime rate, which goes up and down in lock step with the Federal Reserve's short-term-rate ratcheting. The Fed has imposed ten quarter-point hikes since June 2004, boosting the prime to 6.5% and the average home-equity line to 7.04%.

Say you owe $50,000 on a home-equity line that charges the prime rate plus five-eighths of a percentage point. Before the Fed began boosting rates, the interest-only payment was $192. After the latest rate hike in August, the payment hit $297. With more increases almost guaranteed, is it time to lock in a fixed rate to avoid future pain?

Probably not--unless you think rates will go a whole lot higher. We expect that the prime will rise to 7.25% by year-end, and that it will peak at a quarter-to a half-point higher than that during the first half of 2006. That's not much higher than fixed-rate home-equity loans, which currently average 7.26%. It doesn't make sense to lock in a higher rate so that you won't have to worry about higher rates, says Keith Gumbinger, of HSH Associates, which tracks mortgage rates.

There are other disadvantages. With a fixed-rate loan, you lose the flexibility to pay only the interest; you'll have to tackle larger payments designed to retire the loan in five to 15 years. Plus, you may have to pay closing costs. And some lenders charge a penalty for closing a line of credit within the first three years of establishing the line.

If you still think you'd be more comfortable with a fixed-rate loan--or you're convinced that rates are headed for the stratosphere--you have a couple of alternatives:

Lock in part of your loan. Many lenders have dusted off this option, introduced before the last refinancing boom. You can convert all or part of your outstanding balance to a fixed rate--once, and sometimes multiple times--often at no cost. The variable rate would still apply to future draws, preserving your ability to make lower, interest-only payments on the new amounts.

For example, this flexibility might prove valuable if you're halfway through paying for a child's four-year college education with the line of credit. You could convert the balance for the first two years to a fixed rate with a fully amortized payment and use variable-rate draws for the next two years. Plus, once you paid off the fixed-rate balance, the money would again be available for withdrawal from the line of credit for other uses.

Wells Fargo has added a slight twist. Its SmartFit program features a draw period often years, but the interest rate is fixed for the first three, five or seven years. The rate is a bit higher than for a home-equity loan from Wells Fargo--the five-year option is currently about 7% in California--but you can choose either to pay interest only or to make payments toward the balance. After the fixed-rare period expires, a variable rate applies--bur you can still convert a portion of your outstanding balance to a fixed rate at no extra charge.