home equity

HELOC rate almost certain to rise

Don TaylorQuestionDear Dr. Don,
We currently have home equity line of credit loans priced at the prime rate minus 1 percent. What is your guess about where the prime rate is headed? We are watching the rate in The Wall Street Journal every week.

What is the best time to look for a 15-year fixed-rate mortgage to convert our HELOC loans? What are the main factors we should consider before we proceed for applications? Please reply as soon as possible.
-- Narendra Notion

AnswerDear Narendra,
The prime rate as currently structured is 3 percent above the targeted federal funds rate. With the targeted federal funds rate between zero and 0.25 percent, the prime rate is 3.25 percent. Let's face it -- the prime rate isn't going to go lower, it's only a question of when, and how fast, it will go higher.

While the consensus view has the Federal Reserve taking its time in raising the targeted federal funds rate, a 15-year mortgage isn't priced on the federal funds rate; it's priced on the 10-year Treasury note. That security has seen its yield rising over the past few weeks.

You don't have to buy The Wall Street Journal -- you can follow the prime rate using Bankrate's Rate Watch feature. It also makes sense to keep your finger on the pulse of the mortgage market by reading the weekly Mortgage Rate Trend Index. I have my copy delivered as an e-mail every week.

If you plan to be in the house long enough that refinancing to a fixed-rate mortgage makes sense, I wouldn't dawdle in moving forward with refinance. The rate will be higher than your current rate, but you'll be locking in at rates that from a historical perspective, are at or near market lows.

If you only plan on being in the house for a year or two, stand pat. Otherwise, move quickly to capture these relatively low fixed rates.

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.

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.

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