With the recent announcement of a fed rate hike, if you have a home equity line of credit (HELOC) you’ll soon see a rise in your monthly mortgage payment. HELOCs had rock bottom rates for the past eight years and provided an alternative and affordable method to access equity. But as rates trend upward in the months and years ahead, a payment spike of 2% or more may be enough to consider additional options. Here’s why:
Rates Are Going Up
While rates are still low by historical standards, they are set to rise over the course of 2017 and beyond. HELOC rates are tied to the Prime Rate, a constantly moving index, plus a base rate called a margin. Over the past 20 years, this rate peaked at 9.5% and averaged 5.39%. This is almost 2% higher than today’s Prime Rate of 3.75%.
If you have a 2% margin on your HELOC, add this to today’s Prime Rate of 3.75% and your rate would go up to 5.75%. Add it to a 20-year average Prime Rate and your HELOC rate is 7.39%.
For now, it is likely that your HELOC only requires you to pay interest each month. But at the 10-year mark, you must pay a principal plus interest payment amortized over 20 years and your rate will still adjust with Prime monthly.
If the uncertainty of a rising Prime Rate leaves you anxious about your monthly payment, there are two solutions to all this anxiety and extra cost.
Refinance & Pay Off Your HELOC:
Even with first mortgage rates spiking .5% since November, there are still about 4 million homeowners who will benefit mathematically from a refinance of their first mortgage. Depending on how much equity you have, you can combine your first and second mortgage into one loan and pay off your HELOC. This would offer you the benefit of one single mortgage payment at the option of a fixed-rate that would not adjust.
Switch to A Fixed-Rate Second Mortgage:
If you want or need to keep your second mortgage, but don’t want to risk rising interest rates, RPM’s fixed-rate second mortgages provide a stable payment over the course of the entire loan term. This second mortgage can be obtained on its own while your first mortgage’s rate and payment remains untouched. Today, the rate on a 20-year fixed-second is about 1% lower than where your HELOC is headed. This means interest cost on a fixed rate second mortgage is $83 per month less than a HELOC, and your payment is fixed.
Rates on new first mortgages and fixed second mortgages won’t remain this low for long, so let’s replace your rising-cost HELOC before it’s too late. Contact a trusted loan advisor today to discuss your options.