QUESTION: Michael in New York currently has a $70,000 mortgage over 5.75% and a home equity line of credit at 2.25% with a variable rate. He wants to know if he should pay off the home with the equity line of credit since it is a lower interest rate. What does Dave think?
ANSWER: You should either renegotiate with your existing bank or get a new bank and get away from the variable rate. I want a fixed rate.
There are a couple of things you want to do because you’ve got a small mortgage. A home equity loan is a good way to take that mortgage out and get a better rate. You ought to be able to get a rate of about 3% on this on a fixed rate. There is a lot of equity in the house, so it’s a no-brainer and a small loan as mortgages go.
On this, you want three things. You want fixed rate, no closing costs and no balloons or calls. Home equity loans often have an annual call or a three-year balloon or something like that. You want a fully amortizing mortgage on a fixed rate that is set up on $70,000. You could put the note on five years and pay it off.
If the bank that you are with right now won’t do that, some local bank or credit union will make that loan. That loan is a great one for them to have on the books. No closing costs are needed because this is a home equity loan on a house that is worth a few hundred thousand dollars and you only have a mortgage of $70,000. There is no reason for them to charge you with closing costs.
It shouldn’t be over a fixed rate of about 3%, probably a five-year loan.