Dear Dr. Don,
I currently have a 30-year first mortgage with 26 years remaining and a home equity line of credit, or HELOC, at the prime rate, less 0.5 percent. Given the low rates, is now a good time to refinance the HELOC into my first mortgage?
— Joe Jam

Dear Joe,
To fold the home equity line of credit into a 30-year fixed-rate refinancing, you’ll need enough equity in your home to cover the HELOC plus enough to keep the lender happy with your remaining equity in the house. If the loan-to-value is greater than 80 percent, the lender will want you to purchase private mortgage insurance, adding to the cost of refinancing.

An FHA loan will have a lower equity requirement, but you’ll still have mortgage insurance premiums to consider.

You’ve got a great rate on your HELOC. You didn’t mention whether the HELOC has a floor, or minimum interest rate. If it doesn’t, the current prime rate of 3.25 percent puts your HELOC at 2.75 percent. As I write this column, the Bankrate national average for a 30-year fixed rate mortgage is 5.32 percent, and the national average for a HELOC is 5.56 percent.

One goal of refinancing is to lower the total interest expense. Another is to make the payments more manageable. A third is to convert an adjustable-rate loan into a fixed-rate loan. While it’s not likely that you’ll be reducing your total interest expense, you are making the payments more manageable and locking in a fixed interest rate at near historic lows for a 30-year mortgage.

It’s important to consider how long you plan to be in the house. You don’t want to do all this financial restructuring if you only plan to be in the house for a couple of years. The closing costs eat up your potential cost savings.

Take a look at the Mortgage Professor’s refinancing calculator “Refinancing Two FRMs Into One or Two New FRMs,” even though it doesn’t precisely depict your situation. If you assume that your HELOC stays at a fixed rate, it will provide you with an estimate of the break-even point in the refinancing.

Read more about refinance.

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