 Changing
HELOC to fixed-rate financing
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 Dear
Dr. Don,
We recently purchased a home in the N.Y. area using a combined five-year
ARM and a home equity loan. Regarding the home equity loan, ever
since we moved in the monthly payment has been going up. The amount
is not too large ($46,000) but since we try to live on a budget,
the increasing home equity payments have made life difficult. I
was wondering if it pays for us to lock in a fixed rate at this
time or should we stick it out?
-- Ephraim Exogenous
 Dear
Ephraim,
Since you're facing rate increases on your second
(home equity) mortgage, you have a home equity line of credit, or
HELOC, rather than a home equity loan. The good news is that the
Federal Reserve Board's Open Market Committee is widely expected
to be within one or two quarter-point rate increases of ending its
cycle of increasing the targeted federal funds rate. There is a
light at the end of the tunnel. Still, an end to rate increases
doesn't mean that short-term rates will reverse the trend any time
soon.
It's good to have a budget, although I prefer to call
it a spending plan. If you're finding it harder to meet your monthly
budget because of rising interest rates, refinancing is certainly
an option. Make sure your loan agreement doesn't have a prepayment
penalty before shopping for a new loan. If it does, that's one more
factor to consider, along with closing costs on the loan. A third
thing to consider is how long you plan to be in the home. Planning
on being in the home long term makes it easier to justify refinancing.
I'm going to make the assumption that you took on
two mortgages as a piggyback loan to avoid paying private mortgage
insurance, or PMI, on the first mortgage. Unless your home has rapidly
appreciated in value since your recent purchase, that approach to
refinancing might still make sense. How much equity you have in
your home will influence the rate you'll be offered. If you had
no equity in your original purchase, and housing prices have cooled
in your market, the appraisal might not support a refinancing.
Current home equity loan rates are virtually on top
of the HELOC rates. As I write this reply, the national average
for home equity loans is 7.54 percent and the national average for
a HELOC is 7.68 percent. If the Fed does raise rates a quarter percent
two more times, the HELOC rate will be about 8.16 percent. It's
easy enough to figure out what that does to your monthly payment.
Take a look at The Mortgage Professor's refinancing
calculator to estimate whether converting your HELOC into a
home equity loan makes sense.
If you can afford the higher payments and are just
upset that these mortgage rate increases are causing you to adjust
your budget, reducing savings or investments, and you plan on being
in the house a long time, I'll argue that you can wait out the Fed
on the short-term mortgage, and your focus should be on refinancing
the ARM.
Five years from now, you might look back at
today's 30-year fixed rates and say; "Why wasn't I smart enough
to lock in this rate?" The national average for a 30-year fixed-rate
mortgage is 6.45 percent. That rate has been creeping higher as
of late, but by historical standards is still a bargain. I can't
tell you where mortgage interest rates will be five years from now,
but the odds are that they'll be higher than they are today.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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