refinance home equity loan?

[tulak]

Looking at Penfed's CD rates (from Brewer's post), I noticed that they have increased their duration for home equity loans @ 4.99 up to 20 years.

A couple of years ago, we took out one of these loans for $40,000 over 10 years. I'm debating if we should refinance this loan and spread it out over 20 years.

I figured I'd ask the forum to make sure my logic is correct.

Right now, the balance is $36,000. If we were to refinance this amount, then our month payment drops from $426 to $238. The rate is the same, at 4.99%, which if I understand correctly, at our 25% marginal tax rate, equates to a 3.75% required return in order to break even.

It seems like I could take any amount that we would use to pay down this loan earlier and buy a CD to get a guaranteed return. Looking at Brewer's post regarding Penfed rates, I could do this by buying a 5-year CD @ 4%.
I also believe that rates will increase at some point within the next 20 years (probably sooner, instead of later), which leads me to believe it would be hard not to break even and more likely, we'd end up coming out ahead.

I need to run the numbers to be sure, but if anyone can let me know if my logic above is flawed, I'd appreciate it!

Btw, a couple of other points that maybe relevant:

1. We have no cash flow issus. Making a $426 payment vs. $238 isn't a big deal. Of course, if one of us were to lose our job, then having the lower payment would be nice.

2. We were originally thinking of paying off this loan sometime over the next year or two, but even with the original loan, we decided to save the extra money instead of paying off the loan. We'd considering paying it off when we stop working, which is a minimum of 10 years.

3. We have a primary mortgage, which is 30 year fixed at 4.75%. No incentive as of yet to pay this one down. We may even keep it for the entire term. Maybe we'll pay it off after we retire. But then again, maybe not.

 

[brewer12345]

I can see two problems:

1) The CD earnings would be taxable, so you have to knock down the effective rate by whatever your marginal tax bracket is.

2) Pen Fed might charge you for some or all of the costs of redoing the HEL. You would have to ask.

I probably would leave well enough alone, but that is me.

 

[tulak]

I can see two problems:

1) The CD earnings would be taxable, so you have to knock down the effective rate by whatever your marginal tax bracket is.

Yikes. I forgot to take that into account. That definitely makes it less attractive.

2) Pen Fed might charge you for some or all of the costs of redoing the HEL. You would have to ask.

I probably would leave well enough alone, but that is me.

If you pay off within 2 years, then you have to cover the costs (for some reason, I believe this was under $100, but I'd have to look to be sure). If I decided to try this, I'd try to negotiate with them to avoid the fees. Not sure if that would work or not.

But in thinking about it, I'll probably leave it as it is. I want to get rid of this debt anyways, which is why I didn't include it in our primary mortgage refi.