Looking For Interest Rate Advice

[SplshMtn99]

I know no one can predict the future with interest rates, but I'm wondering what others think about my dilemna.

FIRST, some facts:
Mortgage has about $40,000 owed; 7% fixed rate; about 8 yrs left - but hope to get rid of within next 5 yrs.

Home equity line has about $17,000 owed; variable rate currently at 4% (it's dropped several times this year); I send in $1000 a month towards balance; so it will be pd off in 1.5 yrs. But hope to use it to buy DH a car around then -- maybe around $20,000.

I haven't been paying a WHOLE lot of attention to interest rates, simply because our mtg balance is so low & time left so short, that any closing costs on any refinancing I could find out-weighed the savings of refi-ing.

But I was thinking of increasing our home equity line (no fees involved to do that) & using it to pay off the higher rate mortgage. And still socking $ towards it every month to still pay everything off in 5 yrs (8 yrs at the most).

Only thing holding me back is: what if the variable rate home equity line rate eventually rises above 7% in the next 5-8 yrs. Then I've made the wrong decision & it would have cost us more in the long run - although at that point the balance would be so small that it might not really make a big difference.

Any other thoughts? We are 39 yrs old. No other debt. No children. This is really our only tax deduction - not that it matters at this point because mtg is so small.

Oh - one more thing. There is possibility that we would sell home in next 5-10 yrs & buy another. But no plans right now. Just a thought.

 

[Loubon]

You can also get a fixed rate home equity loan. They come in different year intervals for example 5 years and are usually 1.5 to 2 % higher than the variable but still lower than your mortgage.

 

[bsnyder]

First of all, congratulations on your dillema! It's an enviable one to have!

I'd definitely try to take advantage of the 4% rate on your Home Equity line.

Talk to your bank, about increasing your line by the amount to cover your first mortgage balance. Leave the rate floating for now, but tell them you want an option to convert to a fixed rate, 5 year term loan, in the future. They'll probably have a small fee associated with doing this. If your bank won't offer this, shop around and find one that will. Local community banks are usually the most flexible.

It will take a little while for 5 year rates to go back up to over 7%. It won't happen overnight. If, and when they do, you would just convert to the term loan.

Your monthly payments, at 4%, (but on a 5 year, fixed payout schedule), would only be approximately $1049. The interest portion of that starts at about $190 a month, so taking the $1000 a month you're currently paying down on the line, and the amount of your current mortgage, you'll actually be paying down the principal more quickly than a 5 year payout.

When you're ready to buy that car, you'll have paid down a good portion of the principal and will have more than enough room to draw the line back up.

 

[SplshMtn99]

Thanks for the info. Definitely a few options I hadn't thought of. Luckily, my bank is a local bank -- and I have a few connections with current employees thru past banking employment. Obviously re-fi'ing was not what I did when working there. LOL

Open to any other ideas too.