home equity

Emergency fund may calm home equity fears

Don TaylorQuestionDear Dr. Don,
I currently own a high-end home in California with a first mortgage at 5.75 percent (conventional loan) and a home equity line of credit currently at 2.75 percent. The total for both loans is approximately $740,000 but I'm not upside down in the home.

I'm concerned that when the interest rates go up, the HELOC will become very expensive. Refinancing the two mortgages into a single loan, however, will increase my monthly expenses and interest rate, because I will then be in the jumbo category. My HELOC lender has indicated I can request a loan modification and convert my HELOC into a fixed-rate home equity loan.

What would be the best way to fix the interest rate on the HELOC? I'm also concerned about getting a pink slip in today's economy. Any suggestions -- other than a fairy godmother?
-- Ryck Refi

AnswerDear Ryck,
Barring the fairy godmother route, the best way to assuage your concerns about getting a pink slip is to build, or build up, an emergency fund. Increasing the size of your home equity line of credit can also provide a reserve, but it may not be feasible based on the appraised value of your home.

As I write this reply, Bankrate's national average for a fixed-rate home equity loan is 7.59 percent. The national average for a new home equity line of credit is 5.7 percent. Given the current rate on your HELOC of 2.75 percent, your loan is most likely priced at the prime rate, currently 3.25 percent, less than 0.5 percent. You can track the prime rate using Bankrate's "Rate Watch" feature.

Review your loan documents to check on the index rate and the pricing spread to that index. While you're reviewing the documents, check out the maximum interest rate change per reset and over the life of the loan, along with any floors or ceilings.

Go ahead and ask your lender what rate it would offer if you converted the HELOC to a home equity loan, just don't apply for the loan to get that answer. Instead, ask for a ballpark estimate on the rate. If you're in a HELOC at prime less than 0.5 percent with reasonable rate caps, I wouldn't rush to refinance the loan. You have a whole lot of room for short-term interest rates to head higher if you're choosing between your current adjustable loan rate and the 7.59 national average rate for a home equity loan.

Take a look at refinancing the first mortgage. If you can come close to Bankrate's national average of 5.21 percent, you could save 0.5 percent on the big mortgage. One caveat is that your HELOC lender would have to sign off on the refinancing, allowing a new first mortgage to replace the existing first mortgage and keeping the HELOC in second position. With your great rate on the HELOC, the current HELOC lender may want out.

Bankrate's Refinance mortgage calculators will help you decide on whether to refinance your first mortgage.

Ask the adviser

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." Read more Dr. Don columns for additional personal finance advice.
 

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

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