 Using
HELOC to finance new windows
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 Dear
Dr. Don,
We purchased a home last year with an ARM mortgage
at 5.5 percent for $236,000. The mortgage payment including taxes
is approximately $1,600. This includes a PMI payment of $250/month.
We also have a $12,000 HELOC. We need $10,000 to finish up some
minor repairs, including new energy star windows. Our heating bill
was astronomical this year. Our home is 100 years old and the windows
have never been replaced.
My current credit score is 550, which I know
isn't very good, and my husband's is 700. Are we better off refinancing
to get rid of the PMI? Or would I be better off getting another
home equity loan to pay off the existing HELOC and finance the home
repairs and then wait to refinance the first mortgage once my credit
improves? My income is twice as high as my husband's.
Thank you.
-- Doreen Denouement
 Dear
Doreen,
It's common for a HELOC to have a prepayment
penalty in the early years, so make sure yours doesn't before looking
to restructure your finances. Depending on the appraised value of
your home, you might be able to get the lender to upsize the existing
credit line to pay for the home repairs and avoid that prepayment
penalty.
Waiting to refinance until your credit score improves
will get you a better rate at the time you're refinancing, but it
could be a higher rate than what you would get today with your current
credit scores. I don't know where mortgage rates are headed, but
odds are, they're headed higher. You can keep your finger on the
pulse of the mortgage market by reading Bankrate's
Rate Trend Index every week. I have Bankrate's Mortgage
and Real Estate News delivered as a weekly e-mail to stay abreast
of that market.
You're in an adjustable-rate mortgage in a rising
interest-rate environment. It's likely that you'd be better off
refinancing with a piggyback mortgage, where the first mortgage
is a fixed-rate mortgage for 80 percent of the home's appraised
value, and then use a fixed-rate home equity loan to finance the
balance. A piggyback loan gets you out from under the PMI payments,
but it does it at a price. The price is the higher interest rate
on the second (home equity) mortgage.
Part of the decision to restructure your mortgages
should depend on how long you plan on being in the house and the
appraised value of the property. You've only been in the house a
year, but a 10-percent increase in appraised value, for example,
gives you quite a bit more flexibility when it comes to restructuring.
Finally, your new windows might allow you to receive
a tax credit under the Energy Policy Act of 2005. The Department
of Energy's Web
site explains this credit:
Consumers who purchase and install specific products,
such as energy-efficient windows, insulation, doors, roofs, and
heating and cooling equipment in the home can receive a tax credit
of up to $500 beginning in January 2006.
The site states that most of these tax credits remain
in effect through 2007. Talk to your tax professional if you have
questions about this credit, or refer to this IRS article, "Treasury
and IRS provide guidance for energy credits for homeowners."
The article states, "The maximum credit for all
taxable years is $500 -- no more than $200 of the credit can be
attributable to expenses for windows."
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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