home equity

Refinance HELOC into fixed-rate loan?

Don TaylorDear Dr. Don,
I have a variable-rate home equity line of credit, or HELOC, at 2.9 percent. I'd like to convert it to a fixed-rate mortgage. I have 20 years remaining to pay off the home equity line.

Would it be beneficial to convert from the HELOC to a fixed-rate HELOC, or fixed-rate mortgage, for a 15- to 20-year term? Someone suggested that I should make the change because the market is changing and my variable rate might skyrocket. Any suggestions would be appreciated.

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The home is worth about $700,000. The HELOC balance is $227,000 and there is no other mortgage on the property. There are two years left in the draw period, but I have no plans to draw down additional funds. I haven't checked my credit score in a while, but the last time I did it was around 700.

Thank you,
-- Jennifer Juxtapose

Dear Jennifer,
We need to look at the terms of your existing loan. Does the interest rate on your HELOC adjust with changes in the prime rate or with changes in Libor?

House on calculator © Karen Roach / Fotolia.com

A HELOC at 2.9 percent is probably based on the prime rate, which is currently 3.25 percent. That means your loan is 0.4 percent below the prime rate. Is there a cap on the interest you can be charged on the loan? And, at the other end of the spectrum, is there a floor rate?

Most HELOCs switch from interest-only payments to an amortized payment at the end of the draw period. Some have a balloon payment. A switch to an amortized loan can cause a big increase in the monthly loan payment.

You'll want to lock in a fixed rate before mortgage interest rates begin heading higher. That presumes you plan to stay in the home for more than three to five years. I think that would be smart, although I expect your HELOC will carry a lower interest rate than the refinancing rate for the next several years. Fixed-rate loans are tied to the 10-year Treasury note. Even if the prime rate stays low over the next few years, the 10-year note isn't likely to stay at such low levels. That means waiting could get risky or expensive.

As I write this, Bankrate's national average for a 15-year fixed-rate loan is 3.41 percent, and 4.28 percent for a 30-year fixed-rate loan. A 20-year fixed-rate loan should be somewhere between these two rates. HELOCs and home equity loans have gotten a lot more expensive since you got your HELOC.

Check your credit history and score before you start applying for loans. Ideally, your credit score is higher than 700. If you apply with multiple lenders, do it in within a two-week period so the multiple applications don't count against your credit score.

If you plan on staying in this home indefinitely, then a fixed-rate loan is the way to go. Choose a loan term that allows you to easily make your mortgage payment. If you don't think you're in the house for the long haul, a 7/1 or 10/1 adjustable-rate mortgage will give you a fixed rate over the time you plan to be in the house, but lower than a fixed-rate loan.

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