Refi Question-Mortgage v HELOC

[PatsGirl]

I decided to check into refinancing my mortgage since the rates are dropping and have been offered either a 15-year 4.875 fixed or a 3.25 variable HELOC with interest only or interest/principal payments. Total amount is $48,000 for payoff. I put in an app for the 3.25 interest only (which I think is around $150/month so I'd put another $500 towards principal each month).

Can anyone think of reasons this might not be a good idea? There are no hidden costs and no tax repercusions (I don't itemize because the HoH exemption is always higher than they are, even including mortgage interest, etc.) It is my understanding that the rate is fixed on the first of each month based on Wall Street prime or something like that. The bank rep told me she has the HELOC and just watches the rates each month and will refinance when and if the rate becomes too high but in the meantime I'd save over $100/month on interest.

Can anyone enlighten me to pros and cons? Thanks, Brenda

 

[Cheshire Figment]

I would suggest find out a few things first.

1. What is the HELOC tied to (Base Rate)?

2. How much above the Base Rate is the interest rate?

3. What is the current rate on your mortgage?

4. What will be the total closing costs to refinance now?

5. If you go to refinance in a year (or even in a few months if the base rate starts going up a lot):
(A) What will the fixed rate be at?, and
(B) What closing costs would you have to pay on the additional refinance?

Normally it is only worthwhile to refinance if the costs involved will be recovered within three years.

 

[breezy1077]

Take the fixed rate! There is no reason for anyone to be on a variable right now.

The only reason to take the HELOC would be if you plan to keep reusing the equity line.

If she wants to fix it by refinancing down the road if the variable rate starts to creep up - then I guarantee you she won't be able to offer the same fixed rate that she's offering now on a fixed closed ended mtg.

Take the fixed now. Also, noone knows what the future holds. You'd be rolling the dice on whether you could refi in the future. Everyone thinks they'll be able too - but in my 14yrs experience, you'd be surprised how many times folks get stuck in their adj.. Now, you can always "fix" the portion of the heloc - but it won't be at the 4.875 you're being offered now.

Take the fixed now.

 

[mrsv98]

I think it depends on two things: how risk averse you are and how disciplined you are in terms of money management.

Will you really watch the rates every month? How much would it cost to re-fi again in terms of fees? Are you going to set up automatic deduction so you will really pay the extra $500/month in principal? Will you be tempted to skip a month or two if money gets tight?

I am very risk averse. We are refinancing at a fixed rate, dropping our rate nearly 1.7% but leaving the payment the same through auto-deduction. We will cut years and years off the end of the loan without the risk of rates going higher.

 

[breezy1077]

I think it depends on two things: how risk averse you are and how disciplined you are in terms of money management.

Will you really watch the rates every month? How much would it cost to re-fi again in terms of fees? Are you going to set up automatic deduction so you will really pay the extra $500/month in principal? Will you be tempted to skip a month or two if money gets tight?

I am very risk averse. We are refinancing at a fixed rate, dropping our rate nearly 1.7% but leaving the payment the same through auto-deduction. We will cut years and years off the end of the loan without the risk of rates going higher.

Smart move. And she's right OP. A lot of folks think they'll pay the extra but don't. Or if you do, it's easy to justify skipping a month every now and then.

With the rates that close - I'd take the fixed rate now. Peace of mind is worth something too. Also, the bank person would love for you to refi "down the road" out of the heloc - they probably get paid for doing the loan again.

Unless it's to accomplish different goals - I don't think anyone should be "pushing" an adjustible right now. The only person benefiting from that is the mtg person. Again, unless it meets unique goals. For instance, you plan on using the heloc money in stages or plan to keep reusing it. Or for other adjs. like 3-1, 5-1, or 7-1's - if someone plans to definitely move in the fixed portion of their loan - then an adj. is ok. But, banks right now aren't even giving much incentive in the diff. in the fixed/adj rates. They want consumers to have the stability of the fixed rate right now.

 

[PatsGirl]

Thanks everyone for your input. To answer some of the first questions my current rate is 5.875 on a 10year fixed, then adjustable at that point and I'm 7 years in right now so it will be adjustable in 3 years anyways.

HELOC rate is 1% above the Wall Street Prime (I think this is what they call it) and is 3.25 right now. I looked at history and it hasn't gone over 6% in more than 5 years.

Closing costs right now are about $1400 if I remember correctly from the many different banks I called for rates and that is to decrease my rate 1% even.

If I go into a refi again within the next 12 months, there are fees, after that, none so that's a non-issue because I wouldn't refi immediately after doing this but I am watching the rates in the upcoming weeks to see what President Obama may do before I make a decision. If I could get a 4% fixed I'd jump at it and I believe this is onboard for discussion in DC.

As for as being disciplined on payment, I have paid nearly double my mortgage every month now for 7 years without fail and at least one week early. Worse case scenario is unemployment and I would still be able to make payment in the $500 range from other income sources.

My goal is to have this mortgage/HELOC paid off in 10-12 years but I haven't crunched those numbers yet with the $150 interest plus principal to find out exactly how much principal I would need to pay.

What is the worst that could happen? Does anyone think the mortgage rates will go higher than 6% in say the next 7 or 8 years? Should I hold tight and hope for the 4% fixed rate that MIGHT come around? Is there anyone out there that thinks the HELOC is a good idea? I just can't wrap my mind around throwing out a $100/month interest savings....

 

[PatsMom]

I'd shop around on the starting rate for the HELOC. I've seen prime minus one for good customers of some banks. They may require that you immediately draw on the line for a certain amount but you can always write a check to deposit to your checking account, wait a few days and then pay down the HELOC to what you originally wanted it to be.

Sounds like you have the self-discipline to aggressively pay down principal! I'd go for the HELOC and try to keep an eye on rates. Especially if you can find one that is prime or prime minus 1.