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Mortgage for HELOC?

Chris Farrell Mar 29, 2010

Question: My wife and I currently owe about $60k on our 15yr mortgage at 5.125% with 8 years until it is paid off. Our bank is currently offering a promotional HELOC at Prime (currently 3.25%) less .01%. There are no application, appraisal, origination or other fees for the HELOC although there is a $25 annual fee. It looks like if I paid off the mortgage with the HELOC and Prime stayed at 3.25%, we could pay off the mortgage in about 7.5yr (assuming we continue the $717 monthly payment) and save about $5k in interest. What’s your advice? David, Royal Oak, MI

Answer: I’ve gotten a number of questions along these lines recently. Low rates are nice. But the cost savings you came up with from substituting your mortgage at 5.125% for a home equity line of credit at 3.25% depends on the prime rate staying where it is right now. The risk in this strategy is that the prime rate goes up and you end up paying more than 5.125% on the home equity line of credit (heloc) over the next 7.5 years or so.

Right now, the safe forecast is that the bank prime rate will go up over the next few years. The Federal Reserve Board has already signaled that it will start hiking its benchmark interest rate once the job market improves. (We could get the first truly positive job report in three years on Friday when the government reports the payroll and unemployment numbers.) Banks typically boost the prime rate the same day that the Fed announces a rate increase. Borrowing also goes up as the economy strengthens, putting additional upward pressure on interest rates.

Unless you want to 1) gamble and 2) vastly accelerate your house payments I’d stick with the interest rate certainly of your fixed rate mortgage.

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