 Timing a home equity loan closing
|
 Dear
Dr. Don,
I was approved for a $75,000 fixed home equity loan at 6.94 percent for a 15-year term, with no closing costs or any upfront fees. I can afford the monthly payment.
The money will be used to consolidate debt and finance some home improvements. My question is, "Should I wait until the spring and see if the Fed cuts rates, and hope to get a better fixed rate?" I'm not doing the home improvement project until spring at the earliest.
Thanks,
Jim Juncture
 Dear
Jim,
I'll be the first to tell you that I don't know where interest rates
will be next spring. It looks like the Fed is nearly done for this
interest rate cycle in raising its target for the federal funds
rate. That doesn't mean that it will start to ease (cut) that rate
any time soon.
A fixed-rate home equity loan, unlike the variable
rate home equity line of credit, or HELOC, isn't priced off a short-term
interest rate, so it's not easy to project home equity loan rates
next spring based on expected cuts in the targeted federal funds
rate.
With a 15-year home equity loan, it's better to keep
an eye on the yield of the 10-year Treasury note. As I write
this, the yield on the 10-year Treasury note is 4.55 percent. In
my estimation, the probability of the 10-year Treasury note being
significantly lower than that rate in six months isn't all that
good but, as I said before, I don't know where interest rates will
be next spring. You can track both fed funds rate and the CMT
(constant maturity index) 10-year yield on Bankrate's Rate
Watch pages.
You haven't provided a breakdown in how you plan to use the loan proceeds but, to the extent that you're using the home equity loan for debt consolidation, closing on the loan now allows you to consolidate the debt now.
Borrowing the money today for home improvements you
plan to take on in four to six months will have you paying interest
expense on funds before you need them. While you'll have the
opportunity to invest that money until you need it next spring,
consider the after-tax interest expense versus the after-tax return
on those investments over the next six months.
A
CCH calculator can help you find the effective rate on your
home equity loan -- assuming you can deduct the interest income
on your taxes.
If you're paying 7 percent on your mortgage pretax
and earning 5.5 percent pretax on your investments, you'll have
a hard time covering the interest expense with your investment income
on an after-tax basis.
From a rate perspective, I think you're better off
financing the fixed-rate home equity loan now, rather than waiting
for spring. That said, you really need to consider what you're
going to do with the money both in debt consolidation and home improvements.
For example, it's easy to trade unsecured credit card
debt for secured home equity debt, but the debt consolidation won't
accomplish much, if anything, if you don't address the fundamental
problem in how you racked up that debt in the first place -- spending
more than you're able to pay each month.
Converting auto loans to home equity debt can have some nice tax and interest rate advantages, but taking 15 years to pay off a car that you may only drive for a few of those years doesn't reduce the total interest expense on the car.
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."
| 
