Question by JHC: Should I roll in my HELOC when refinancing my mortgage?
i’m refinancing my mortgage to a 20-yr fixed @4.25%. should i roll in my HELOC? i have a $ 30k balance at prime-3.25%. i think i can pay off the HELOC in 3-5 years. even if the interest rate rises a couple points, wouldn’t i pay less total interest in 5 yrs vs 20? or are there other factors i’m not considering? mortgage is about $ 350k.
Best answer:
Answer by Alpha O
Great question! I’ll answer from the point of view of owning a mortgage brokerage for the a number of years.
There wasn’t enough information about your current loan to value. If the addition of the HELOC into your payoff were to kick your loan into needing mortgage insurance, I would NOT advocate paying off your HELOC. Aside from that, because you plan to be able to pay off your HELOC in 36-60 months, I would leave the HELOC alone all things being equal. First off, if you were to roll the HELOC balance into the new mortgage, you would be perpetually left with the higher payment even if you were to make additional principal payments on the new loan. Additionally, the HELOC can be a liquidity and convenience tool as time goes forward and leaving it so that you have access to the line even as you pay it down can prove to be advantageous. Lastly, and this sort of dovetails with the very last sentence, there is a mortgage acceleration program that actually uses the HELOC as a tool to very rapidly pay down the first mortgage. (As an example it would probably pay off your 20 year loan in about 11-12 years and you wouldn’t feel the impact in your monthly budget).
Aside from these considerations, as you pointed out, you’re paying less interest on the HELOC balance now anyhow so that’s an obvious savings presently.
One last consideration, it’s possible that your HELOC lender may offer a fixed rate lock-in option if rates started to climb unreasonably which is just an added measure of ‘safety’ and helps make the case to keep the HELOC where it is.
Hope that was helpful; If you need more details (esp. on the mortgage acceleration idea), feel free to send an email.
Best,
Eric J.
InSarasota35@yahoo.com
Eric
Add your own answer in the comments!
First option
$ 30k @ 3.25% for 4 yrs ==$ 667.06 per mo.(int=TL$ 2019)
$ 350 K @ 4.25 % for 20 years =2160.39 ” ” (Int. =TL168,494)
TL per mo for both is $ 2827 comb. Int.=TL $ 171,145.36
2nd option
$ 380K @ 4.25 for 20 yrs=$ 2346 per month (TL INT= $ 182,936)
**These do not include taxes, and insurance.
** You would save $ 11,790.74 by paying off the HELOC separate, and in four years.
PLEASE FOLLOW THIS NEXT: third option
If you combined both loans,
$ 380k, @ 4.25% for 20 yr, combined the $ 2345.57 + $ 482 (TL = $ 2828) In other words, if you combined the amount of the two payments (Opt #1), but had the one loan, you would be finished with the loan in 15 years + 3 months, and SAVE $ 47,942.69 IN TL INTEREST (your tl interest to pay is ($ 134,993).
Fourth option:
$ 30k @ 3.25% for 4 yrs ==$ 667.06 per mo.(int=TL$ 2019)
$ 350 K @ 4.25 % for 20 years =2160.39 .
After the HELOC is paid off, continue paying the $ 667 you were paying on the HELOC into the 4.25% loan. Your combined payment stays the same $ 2827. But you shave off 4 years and 10 months in loan time, and now the total interest paid is $ 131,884 plus the $ 2019 ==$ 133,903.
This is a savings of $ 49,033!! (off option 2) and the most savings in both time and money.
No.
A HELOC is just extra debt.
Rule of thumb is to pay off the HELOC along with regular debt, because it puts your house at risk; does not matter the interest rate. (Adds debt and foreclosure risk over time).
Pay off the HELOC separately, then start investing that payment into a 401K or Roth.
Google Dave Ramsey.