Dear Dr. Don,
I have my first mortgage as my home equity loan. It is currently at 3.49 percent and will fluctuate with the prime rate, prime minus 0.25 percent. I was reading your article about replacing your first mortgage with a HELOC and started wondering: Is it smart for me to keep this as my first mortgage or should I consider a mortgage refinance now with rates around 5 percent? Will prime start to go up soon? With inflation looming, will prime go way up?
— Justin Time

Dear Justin,
You’re kicking it old school, meaning you have a home equity line of credit priced at the prime rate less 0.25 percent, with a floor rate of interest. Bankrate’s national average for a HELOC is currently 5.61 percent.

The prime rate is currently 3.25 percent, making me think your HELOC’s floor is 3.49 percent. The prime rate used to be more meaningful as a measure of the interest rate a bank charged its best customers. But when retail customers, like you, can get prime less 0.25 percent, the prime rate has lost much of its meaning. It’s easiest to consider prime as 3 percent over the targeted federal funds rate, which is currently in a range of zero percent to 0.25 percent.

Yes, inflation is looming. The dollar is weak, and the Treasury is issuing a lot of debt. But short term, there isn’t a whole lot of upward pressure on the targeted federal funds rate. Your decision to refinance at today’s low 30-year fixed rates would depend in large part on how long you plan to be in the loan.

If you’re in it for the long term, refinancing at today’s rates makes a lot of sense. If you’re a short-timer, there’s less of a reason to take on the closing costs and higher interest expense to lock in a long-term rate.

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