Question of the week: Should I refinance to pay-off my home equity line and fix the interest rate?
Answer: Yes. No. Maybe.
The answer to this question, like for many Questions of the Week, is situational.
Everyone who has an outstanding Home Equity Line of Credit (HELOC) has seen their rate increase one percent (1.00%) since the Fed began raising interest rates in December 2015, and increase half a percent (0.50%) since December. Common wisdom is that the Fed plans on increasing its Federal Funds Rate as many as two more times this year and perhaps a few more times in 2018. Whenever the Fed raises or lowers rates banks follow and the result is an increase or decrease in the Prime Rate, which is the base rate for HELOCs.
Most HELOCs have a margin over Prime that sets your interest rate. For instance is your HELOC rate is Prime + 1.5% then your rate is the current Prime Rate of 4.25% + plus the 1.5% margin resulting in your interest rate of 5.75%.
Because the Prime Rate is near the 30 year rate, either below, at or above depending on many factors, many homeowners are deciding now is a great time to lock in the rate on their HELOC before the Prime Rate goes up further, or mortgage rates climb.
Should you refinance and lock in your interest rate on your HELOC?
There are several factors we look at when advising clients whether to refinance and consolidate their mortgages or not.
- What are your balances on your primary mortgage and HELOC?
- How much equity do you have in your home? (Estimated value less combined balances of your primary, or first, mortgage and your HELOC)
- What are your current rates and payments on your primary mortgage and HELOC?
- Are you in a position where you can pay off the HELOC in the near or medium future?
- When is your HELOC due? When does it go from interest only minimum payments to fully amortized?
There are more questions that come into play once we get into the nitty-gritty details but these basic questions provide a lot of guidance.
If you have a very low rate on your primary mortgage and a small balance on your HELOC that you can pay off in a few years then it probably does not make sense to refinance.
If you balances on your mortgages are about equal and you have enough equity we might be able to refinance your HELOC and your payment is equal to or slightly less than your paying now on both loans, in this case it may make sense to refinance.
When considering the payment on the HELOC, if you have been paying interest only and have a large balance owing on the HELOC it may make sense to refinance, fix the rate and start paying down your principal.
There are several variables to consider if you have a HELOC as to whether you should refinance and pay it off, to go through your situation and determine options available regarding your HELOC please call me and we can go through the numbers and options.
Have a question? Ask me!
Stretches hands over head, has a big yawn….That was the markets on Wednesday after it was announced that the Federal Reserve Open Market Committee raised its benchmark discount interest rate by one-quarter of one percent to a rate of 1.75%, this is the rate the Fed charges member banks to borrow money. The rate increase by the Fed has been priced into the rate markets for a few months, as a result an action that should have seen mortgage rates increase resulted in no change in rates.
Impact on the Fed rate increase will be felt immediately by those with Home Equity Lines of Credit as the Prime Rate follows the Fed discount rate. As a result of the Fed’s increase the Prime Rate is now 4.25%.
That was the headline news but more importantly was the economic data released this week, and it wasn’t very good. Three big pieces of economic data for May, the Producer Price Index, the Consumer Price Index and Retail Sales, show an economy that appears to be slowing. Leading the way was PPI which was flat from April and is up 2.4% from May of 2016. As for consumers, the CPI dropped 0.1% in May from April and is up only 1.9% from a year ago. Pulling down CPI was an increase of 0.2% in home prices—which have been carrying the price index for the past several years—as well as a drop of 6.4% in gasoline prices. Of big concern is that prices are trending down. And following our economic lesson above supply and demand has led to the lower prices as retail sales in May were down 0.3% from April, retailers will likely drop prices in June to capture more sales. The reports on prices and sales are very mortgage market friendly.
Rates for Friday June 16, 2017: Given the sluggish economic growth and stagnant prices as a backdrop for the Fed increasing rates there has been a fundamental shift in what the Fed considers is important in determining rates. For decades the primary focus has been inflation as an indicator of economic activity and the primary gauge for the target rate for the Fed. For the past year plus the Fed has indicated that the labor markets will be a more important factor in determining rates and this was proved out on Wednesday when the Fed faced with slumping prices increase rates stating the primary reason is strengthening labor markets. Looking ahead we will see investors begin to price in the next anticipated Fed rate increase in the next several weeks, as such in the medium term we should see an increase in mortgage rates. There should not be a tremendous increase but somewhat of an increase. Rates run their streak of flatness to their fourth week in a row.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 3.75% Flat
30 year high-balance conforming 3.875% Flat
30 year FHA 3.25% Flat
30 year FHA high-balance 3.75% Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.
A lot of people have Alice Cooper’s classic song for summer running through their heads this week as School’s Out for Summer. I told the girls the other day that I won’t see them in the morning until early September with one or two exceptions given our different natural sleep habits.
At this point summer seems infinite to them and other K-12 kids, and in two and a half months they will be telling us how short summer seemed.
Have a great week,