Feeling nervous about HELOC loan amount - Advice?

[Anonymous]

Would appreciate any advice folks have on our mortgage situation. We bought a house in June in North Arlington and the purchase price ($900k) was a bit of a reach for us, made easier by the great interest rate. We took on a 1st trust, 30 year P & I loan at 3.5% for $625k. We then did a 10-year HELOC for $140k which is currently at prime (i.e., 3.5%) but with a variable rate. I am worried that the Fed will raise interest rates, causing the HELOC rate to increase. Would it be better to try and get a jumbo loan for the total loan amount (i.e., $765k) at current rates (which I'm guessing are around 4.3-4.5%) to ensure that we have a fixed rate on the total loan amount? Or, could we try and get a normal 2nd trust with a fixed rate, albeit higher than the 3.5% HELOC variable rate? Any other ideas? If at all relevant, we did some work on the house which we believe makes the house worth around $975k (Zillow estimate $1M but I think that's questionable). Thanks!!

[Anonymous]

How high would rates have to rise for the HELOC repayments to be beyond your reach? It would probably make more sense for you to switch from a line of credit to a home equity loan rather than refinance the entire amount when you have $625k loan locked in at 3.5 percent which you'll lose. Either do that or keep up with the current variable rate until it becomes untenable. If I was in your situation I'd be putting all my extra cash toward paying that HELOC down.

[Anonymous]

why did you buy something that is a reach and potentially crush you financially?

but since you are already in the water--

if the house has increased in value and you have enough equity refi and close the heloc loan and have one loan.

[Anonymous]

OP here - not under water but erring on the side of caution for the future when interest rates will inevitably go up. I think the idea of paying down the HELOC principle as much as possible now, with the rate at 3.5% is the right way to go as I'm guessing an enlarged jumbo loan at even a point higher would make the monthly payment higher than what we'd want to pay. We're trying to figure out whether we should use the $1k/month that will be freed up in a few months (once our daughter is out of daycare) to pay down the HELOC that much per month or rather just put that money into savings.

[Anonymous]

Does the HELOC have a lock feature to convert to a fixed term, fixed rate?

If so you will want to wait til rates go up, now with rates low the lock rates are very high. As rates go up, lock rates will come down to less of a spread. That may or may not be want you want to do later dep. on the facts/details.

Savings now will get you 0-1% or so, so paying off a 3.5% loan (~2.45% or so net after tax rate) is a better "investment" in your situation IMO.

Can't really advise on the new jumbo question.

[Anonymous]

Anonymous wrote:Does the HELOC have a lock feature to convert to a fixed term, fixed rate?

If so you will want to wait til rates go up, now with rates low the lock rates are very high. As rates go up, lock rates will come down to less of a spread. That may or may not be want you want to do later dep. on the facts/details.

Savings now will get you 0-1% or so, so paying off a 3.5% loan (~2.45% or so net after tax rate) is a better "investment" in your situation IMO.

Can't really advise on the new jumbo question.

Not op but why would the lock rate spread decrease if rates went up?

[Anonymous]

Op, if you qualified for that much loan your income must be $500k or more. Do you really worry?

[Anonymous]

Anonymous wrote:Op, if you qualified for that much loan your income must be $500k or more. Do you really worry?

please. you can qualify with a lot less than that.

[Anonymous]

The media and RE industry love to scream about rates going up just around the corner.. I think rates are going up, but not anywhere near as fast as most believe.

Most helocs have a max rate and max rise per year. Do the calculation if the rate went up as fast as it possibly can, could you cut expenditures and pay it down aggressively?

If the answer to the above is yes, then look at the yields on long dated treasuries (the yield of various maturity instruments is called the yield curve). From this you can get an idea of what the market expects rates to go to over the time when you expect to be paying down the loan. Then you can answer your original question of wheher nor not to refi into a jumbo fixed.

[Anonymous]

OP, I would start putting every dime you have towards paying down the HELOC (assuming you already have a emergency fund). Are there any other payments you make that you can temporarily reduce or put on hold? How much are you saving? Can you temporarily reduce retirement savings?

[Anonymous]

Anonymous wrote:OP here - not under water but erring on the side of caution for the future when interest rates will inevitably go up. I think the idea of paying down the HELOC principle as much as possible now, with the rate at 3.5% is the right way to go as I'm guessing an enlarged jumbo loan at even a point higher would make the monthly payment higher than what we'd want to pay. We're trying to figure out whether we should use the $1k/month that will be freed up in a few months (once our daughter is out of daycare) to pay down the HELOC that much per month or rather just put that money into savings.

I think that's what I'd do. With the additional 1K per month, how much - total- would you be paying on the 140K each month? Just trying to get a feel for how quickly you can knock that down..