Need Freeper Advice on Home Equity Loan Decision (vanity)

9/21/05 | Myself

[Mrs. B.S. Roberts]

Help! Put on your economics hats out there.

I'm trying to decide whether I should convert my variable rate home equity line to a fixed loan now that The Fed has raised the rates again. Is this just one more rate hike in a long line of future hikes; or is it a post-Katrina reaction? My equity line started at 3.5% and is now at 6.5%. I can lock into a fixed loan at 7.2%.

I know there are a lot of Freepers out there who have a wealth of accumulated real estate and financial savvy. I was hoping to get some good direction from someone who has their "ear to the rail" so to speak.

I live in Massachusetts and I'm not sure if I should I move now in anticipation of future hikes or if I should take my chances and count on the Fed dropping rates again in the future. Any ideas would be very welcome.

Thanks for your input!

[Mrs. B.S. Roberts]

The Dread Pirate Roberts told me to post this as a vanity to get the best advice on the 'net.

[Graybeard58]

I expect the rates to continue to increase but I'm no financial wizard. I expected increases a long time before they actually started happening.

[M. Dodge Thomas]

Depends for starters on the size of the HE loan, your income, and your investments. For example do you have enough in relatively liquid investments to pay it off? What are they currently returning?

[M. Dodge Thomas]

Depends for starters on the size of the HE loan, your income, and your investments. For example do you have enough in relatively liquid investments to pay it off? What are they currently returning?

[Peach]

Can you help this freeper.

[SoDak]

Just out of curiousity, would you borrow money using your house as collateral to invest in, say, a mutual fund?

[Ken H]

You can crunch numbers here:

http://www.1728.com/mortmnts.htm

And here:

http://www.1728.com/calcloan.htm

Personally, I'd be inclined to lock in the 7.2% on the basis that you put a ceiling on your payments. No one can reliably predict the direction of interest rates, IMO.

[the_Watchman]

If one thinks of money as a commodity, then consider that a whale of a lot of people in L.A., Miss, and Alabama (and soon to be Texas) just got themselves into a situation where they will need to borrow a lot of money. Even if we assume that a lot of the loans will be underwritten by the Feds, there will still be a large strain on the money markets.

I assume that interest rates will be pushed upwards. for the same reason that gasoline became more expensive. Demand!

[doug from upland]

Discuss this with at least three financial advisors, perhaps mortgage bankers or brokers. Keep in mind, however, that they may want to be selling you their product.

Many things will go into your decision. Do you plan to move from the house in a few years? Are you near retirement and fixed income? What are the costs and how long will it take you to recapture them? Go through a several year projection to see the real impact of what you are doing over several years and compare it to keeping what you now have. If you lock it in now, can you redo it later if interest rates go down without prepayment or other costs? You might try making a deal with a private party. Would someone you know make the same loan without costs at a good interest rate for you? It would be better for that person than a savings account.

[going hot]

ditech has a 6.00 fixed for 30 and a 6.25 (with points) on a fixed for rental unit (second home). based on your credit and repayment ability, call them up, they will qoute over the phone, with no cost to you. On line they are ditech.com.

And no, I have no financial interest in their businesses!

[Izzy Dunne]

There's no question you'll get the best advice on the net here.

Your mission, should you choose to accept it, is to decide which post contains it.

[diamond6]

bump

[Ethrane]

Before the Katrina mess, I had heard from lots of 'experts' that they felt the home mortgage rates would remain stable or even decrease, due to a drop in demand for home mortgages. The experts all seemed to think that what the Fed was going to do with rates wouldn't matter much in the housing market.

After Katrina? I doubt anyone can tell you with any degree of certainty...so I'd be inclined to lock in a rate and then if rates go down again significantly in the future, you could refinance.

But that's just me...I do not like uncertainty.

[WKL815]

I've been thinking about this for myself lately too.

My thoughts: There was talk that they wouldn't and I had hoped the fed wouldn't raise the rates again, but they did. This makes me even more bearish on future hikes going forward. I know the economy is strong during what have been serious events but I just can't help but think that rates won't go too much higher. Greenspan's stepping down - don't know what to expect after he's gone.

I've decided not to do anything. As much as I hate seeing the HELOC rate go up, I feel I might choke on a 7+% fixed rate. I guess I'll see if this bites me in the bum.

[wardaddy]

The conventional wisdom is one more 25 basis points hike for now.

But, with all the ongoing Fed spending on WOT, and natural disasters one could see booming economy and inflation....maybe ...some see just the opposite.

I tend to think that Greenspan has overreached already with his 11 rate hikes in the past 15 months.

You should be able to fix the HE loan or roll it into your primary at less than 7.2%....low sixes on a 30.... even less on a 15 or so.

If you are over 50 and approaching fixed income, I would fix now.

You can always refinance if rates go down again..

I'm in the same quandry sort of. I have a home equity credit card at prime that I can fix....if need be I can move money and pay it off but I'd rather not ..just yet.

and I'm 47

[Mrs. B.S. Roberts]

thanks for your thoughts. Luckily my home mortgage is fixed at 5.6%. I refinanced at the right time. We live in a 120 year old house and had to repair the roof, new heating system (thank goodness with natural gas climbing). I am only talking about what to do with the home equity line, it's not a lot of money to most; but to me it is. I hate spending money on interest and there's something stopping me from going over the 7% mark.

And to remember that our first house back in the 80's was at a fantastic rate 9.95% when we bought it. (YES, I refinanced several times and moved)

I know I could shop around and get a slightly lower rate, but if I stay with my primary bank they count it towards my balance and therefore all my banking is free. Have you seen
banking fees lately?

[Mrs. B.S. Roberts]

no, never

[wardaddy]

in my commercial accounts those fees are called analysis charges...lol

i'm thinking ...analysis (?)

like Freud or Fromm..lol...where's the couch or the xanax

banks will charge anything they can....i swear...they make almost as much on fees as on loan interest.

good luck...sounds like you ought to fix..

[M. Dodge Thomas]

Just out of curiosity, would you borrow money using your house as collateral to invest in, say, a mutual fund?

The likelihood I would do so is vanishingly small.

However, I frequently make use of a HE loan on my principle residence to cover the carrying and construction costs on rental properties I'm rehabbing prior to refinancing with a fixed term loans after completion - it's just simpler than going construction loan route and I need only draw what I need as I need it.

In any case my general point was that the answer to the question asked above depends a lot on individual circumstance.

Homeowner A has is having a rough time making the current payment on a 1st plus a HE, no savings or liquid investments, and believes there is a good chance that interest rates will be going up a lot over the next few years while his income will not. In this case it may be rational for him to roll HE into a larger fixed rate 1st on which he can just make the payment, accepting the fact he they will end up paying more in interest over the life of the loan to lock in a manageable monthly outlay.

Homeowner B is in the same situation, but has twice the amount of the HE in savings or liquid investments. For other reasons in her financial circumstances it may be rational for her to run the risk of raising rates as she has a cash cushion to cover a possibly rising rate on the HE and in any case can retire it in part or full anytime she decide it makes financial sense to do so.

So both decisions could be "correct", depending on individual circumstances.