Should You Trade in Your HELOC for a Fixed Rate Mortgage?
by Gina Pogol
Fixed Mortgage Rates to Increase?
Mortgage rates increased slightly after the Fed left the mortgage-backed security (MBS) market at the end of March, but have since dropped slightly below that level. Freddie Mac reports that 30-year fixed mortgage rates for loans originated in May 2010 averaged only 4.89%. However, the Mortgage Bankers Association has said it expects mortgage rates to go as high as 5.8% by the end of 2010, which, according to historical data at HSH.com, would be the highest level since November 2008.
If you've been considering locking in a fixed rate mortgage loan, but have been hesitant to bump up your monthly payments to a higher rate, should you reconsider refinancing now--before fixed rates begin to rise?
But ARMs Remain Low
With adjustable-rate mortgage (ARM) rates still lingering under 4.00%, it's not easy to trade up to a fixed rate loan approaching 5.00%. For instance:
- Trading in a HELOC for a fixed rate may require higher monthly payments if you've been making interest-only payments
- Fixed-rate loans generally require amortization, which involves repaying the principal balance
- If you have unused HELOC credit, you may have to close the line out and give up your emergency access to credit when you refinance.
If you don't anticipate owning your home for more than a few more years, you can probably leave your HELOC or your ARM alone. Just be aware of the terms so that any increase doesn't take you completely by surprise. Understand the interest rate caps, which limit how high your rate can go at any single adjustment and over the loan's lifetime.
Splitting the Difference
However, there is another option for those who want to fix an ARM or incorporate a HELOC into a new first mortgage but can't bring themselves to increase their current rate by 2%. Many lenders offer hybrid ARMs with rates that are fixed for an initial three, five, or seven year period before adjusting annually or semi-annually. Rates on 5/1 hybrids are only slightly higher than most ARMs, and you have the security of a fixed rate for several years.
There are a additional options if you have a HELOC but don't want to refinance your first mortgage:
- Refinance the HELOC into a fixed rate second mortgage (the rate will be higher than first mortgage rates)
- Accelerate the repayment of the HELOC now while the interest rate is low. A smaller balance means a smaller hit to your wallet when rates rise.
Your Future
See what you can expect in a worst case scenario, and decide whether you can live with it. Otherwise, speak with a reputable mortgage lender today to find out whether a hybrid ARM might save you money in the long run.
Sources
http://www.hsh.com/ / http://mortgage.freedomblogging.com
About the Author
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte. She graduated with High Distinction from the University of Nevada with a BS in Financial Management.
