HELOC vs Refi?

[kyounge1956]

Back in February at the Home Show I was looking into refinancing my mortgage to take advantage of the low rates. One of the people I talked to suggested that, rather than refinance, I take out an interest-only HELOC and pay off the first mortgage with the line of credit. I've been counting on devoting a certain amount of the equity in my house to my nest egg when I retire, by selling my present home and moving to a less expensive area, but with housing prices looking perhaps flat or maybe even declining somewhat over the next few years maybe I would be better off redirecting some of the money that now goes toward paying down mortgage principal into a "cash bucket".

I've begun to look into this idea a bit, and it isn't clear to me what advantage the HELOC would have over a plain refinancing. Either way my mortgage payments go way down, enabling me to save more (and also to absorb a probable rise in paycheck deductions toward the pension fund of 1% next year and another 2% the year after that). What are the other pros or cons of a HELOC vs refinancing. I would probably opt for a 7 or 10 year rate lock as I can't imagine it being any longer than that until I am able to retire. My planned date with cooperation from Mr Market is 2-1/2 to 4 years from now and I will have 30 years of service & thus maximum pension benefit in about 4-1/2 years.

Specifics: remaining loan balance about $76,500, current interest rate 6.5%, (30-year fixed)

Your thoughts?

 

[Animorph]

You should be able to get the HELOC without a lot of the closing costs. I went variable with my HELOC and refi'd with a 30-year fixed, but I'm planning to stay here forever.

 

[Eyerishgold]

Something I've run across is using a HELOC to refi a mortgage. Then use your entire paycheck to pay down the HELOC while using the available credit to cover monthly expenses. This should allow you to pay off the mortgage faster as long as your expenses are less than your income. On the downside, you'd be using your entire income to pay down the HELOC balance so your funds for investing would be limited until the mortgage is paid off. Not sure if that's what the person at the Home Show had in mind.

 

[REWahoo]

Not sure if that's what the person at the Home Show had in mind.

Is "the person at the Home Show" a good source of financial advice?

OST, maybe no worse than a bunch of anonymous posters on an internet board...

 

[brewer12345]

You could look into a refi, but your loan is getting small enough that it may be hard to generate enough interest savings to pay for a refi. If you do a HELOC, most of them are daily floaters based on prime, so if interest rates increase you will be paying more. Alternatively, you could look into a mortgage such as Pen Fed's 3.875% 5/5 ARM. They eat much of the refi costs and you would shave over 2.5% off your rate. Finally, compare that to the Pen Fed 10 year fixed home equity loan at 4.99%, on which I believe Pen Fed eats all of the costs. Make a spreadsheet and see what makes the most sense. I probably would not do the HELOC, though, simply because of the interest rate risk.

 

[FUEGO]

Penfed also has a 5/5 Adjustable rate HELOC. Fixed at 4.25% for 5 years, then adjusts and stays at that new rate for the next 5 years. The rate cannot go up more than 2% every 5 years, so you would still be at or under 6.25% up to year 11 of the HELOC. No closing costs as long as the loan is open 3 years, otherwise you pay a little (my closing costs were $140 or so IIRC, but I only owe them if I close the line within 3 years).

Not sure exactly what you are trying to accomplish, but with a HELOC you can pay down the balance and draw money back out of the HELOC as long as you want, unless they close your line of credit for some reasonable purpose.

I also have the 3.75% 5/5 ARM product from Penfed as my 1st mortgage (see Brewer's post). This rate may go as high as 5.75% up until year 11. Closing costs to me were $400-500 IIRC.

Either the ARM or ARHELOC would serve you well, and the ARHELOC would increase your liquidity as long as you remained in your current house.

 

[growing_older]

Might depend on how long you plan to have this loan before paying it off. Adjustable HELOC was right for me a few years ago, and I've enjoyed record low rates. Not sure if I would do it again however as rates will eventually climb from here, probably quickly, but no idea how soon that might be.

 

[kyounge1956]

Is "the person at the Home Show" a good source of financial advice?

mebbe, and mebbe not

OST, maybe no worse than a bunch of anonymous posters on an internet board...

well at least the anonymous posters are disinterested if that's the right word. They make no money regardless of what I do.

 

[kyounge1956]

correction: the remaining balance on the existing mortgage is about $67,500, not $76,500.

 

[free4now]

One thing to consider is your likelihood of defaulting. At least here in CA, a first mortgage can be walked away from with no personal liability, but a HELOC second mortgage you remain liable for even if you give up the house (there might be exceptions if you can prove that you used the HELOC exclusively for the home but this is a grey area).

 

[free4now]

correction: the remaining balance on the existing mortgage is about $67,500, not $76,500.

In California that would be a small down payment. The relatively low balance is a good reason to avoid the fixed underwriting costs of another first mortgage.

 

[kyounge1956]

One thing to consider is your likelihood of defaulting. At least here in CA, a first mortgage can be walked away from with no personal liability, but a HELOC second mortgage you remain liable for even if you give up the house (there might be exceptions if you can prove that you used the HELOC exclusively for the home but this is a grey area).

No default. It's worth at least three times what I owe on it, and in the event of a catastrophic loss of income I would just retire from my job and put the house on the market.

In California that would be a small down payment. The relatively low balance is a good reason to avoid the fixed underwriting costs of another first mortgage.

It would just be a downpayment on most houses here too. I bought my first house in 1985, it appreciated hugely, I was able to put about 50% down on this home when I bought it and it has since appreciated a great deal also. I am leaning toward the 5/5 Pen Fed loan that was mentioned on another thread, but I need to find out how much the closing costs would be. I'll probably retire before the first five years is up, and almost certainly before the second five.

 

[kyounge1956]

Well I finally stopped dithering and did it. House has been refinanced (ARM) at 4% with a 5 year lock through Chase Bank, and I paid half a point for the privilege. (Would have been 4.25% with no points.) The refi will reduce my P & I payment by about $200 a month. I plan to pay enough extra principal so my balance in a year is the same as my current loan, and put the rest of the difference into my Roth IRA until the end of this year, and into my tax-deferred plan at work next year and 2012. The plan rules allow employees to put in up to twice the regular contribution for the three years before you retire. There is a "Stable Value" fund in the tax deferred plan that usually grows at 3% or more, so I will build up a bit of a "cash bucket" there. If I did my spreadsheet right, in 3 years I will be about $1300 richer than I would have been otherwise, plus I will have some cash stashed away that I wouldn't have had otherwise. And if (as rumor has it) the employee contribution rate to the City's pension fund goes up next year and 2012, I'll have a bit of slack in my budget to make up for it, which I also wouldn't have had otherwise.