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Is it time to lock in our Home Equity Line rate? I’m Stuck!

by J. Money on Friday, June 20, 2008

average equity loan rate*Update: We’ve decided to go w/ option #1 :)
*Update 2: Our HELOC is currently at 2.80%!

Similar to my car dilemna, now going on 4 months w/out a decision, it’s enough to drive a person crazy.

Do you lock in a rate now and hope you caught it on the rise, or do you wait it out a bit and save more money each month?

The funny part is that Mrs. Budgetsaresexy and I JUST had our first talk about this last Saturday, and we told ourselves that we’d lock in the next time it goes up…thinking we’d have at least a couple months before thinking about it again. Ooops. So I now bring this dilemma to you guys for help :)

Here are the details on our current loan:

  • This is our “2nd Mortgage”
  • It’s a maxed out Home Equity Line of Credit (HELOC)
  • It’s an interest-only loan
  • The rate is variable
  • The current rate is 4.55% (Prime – .45%)
  • The current balance is $62,602.23.

So basically, our current rate is lower than ANY OF OUR OTHER LOANS. It beats out our 1st mortgage, our car loan, and all credit cards. Sexy, ain’t it? Of course though, that’s only how it works out today.

There’s a load of variables to consider here, not to mention hefty pros and cons, and we def. want to stay with USAA for a number of reasons. Here are the 2 options we’re considering

Option #1 – Keep the loan as-is. Rate at 4.55%

  • This rate can change at any time, depending on the Fed.
  • We have 172 months to pay back this loan…8 months have already passed ;)
  • This means monthly payments of roughly $230.
  • PRO: Since we budget for $540 here, we save $300 every month!!! (our original amount when we purchased last year was $540, before re-financing and the fed lowering rates)
  • PRO: Our emergency fund and house savings account gets padded each month with this $300!
  • CON: We have no control since it’s variable – The rate is associated with the WSJ Prime Rate, so it’s all in the hands of the Fed. And considering it’s been cut heavily over the past 10 months, I’m starting to believe the hype that it will start going back up.
  • CON (in theory): It’s interest-only – we are only paying off interest each month, adding nothing to the principal. I say in theory because the average home owner will not add extra to pay off the principal. We usually pay portions off sporadically, rather than a set amount each month. Our initial HELOC was $72k, so we’ve knocked it down by $10k already, even though we have an interest-only loan. Granted, most of this $10k was on accident.

We’ve been with option #1 from day one of buying our house, making it even harder to switch out as we’re so used to it. It’s so freakin’ nice having that $300 cushion to play with :) BUT, we also know that we’ll eventually need to lock in a rate as the tides WILL turn…it’s just a matter of when.

It also gets a bit tricky because the rate above moves with the WSJ Prime Rate plus or minus the lender’s points, while the rate to lock it in moves with the 182 T-bill (3 year ones I believe) plus or minus the lender’s points. So it’s like you have to judge two different trends.

Option #2 – Lock in a rate now at 7.72%.

  • The interest rate will stay exactly the same now, as it will in 10 years.
  • The HELOC would essentially convert into a Home Equity Loan (read about the difference)
  • The loan will ammortize over 180 months
  • The monthly payment would be around $588 (i used this simple loan calculator)
  • PRO: We would now be paying both interest, AND principal. The main portion of course going to interest, but it’s now all built in and mandatory – similar to a normal loan.
  • PRO: No more worrying/thinking about interest rates adjusting, as it won’t matter here.
  • CON: The monthly price tag drastically goes up! no more padding any of our accounts :(
  • CON: We’d now need to re-budget for an extra $45 a month, which is quite different than having an extra $200 to play with!

This lock in rate changes every month with USAA, on the 3rd Tuesday of the each month, so we have a few weeks to decide. It’s important to note though that over the past 3 months it’s gone from a steady 6.75% (from as long as I can remember) to 7.18% last month, and now to 7.72% this month.

As i mentioned, we’re eventually going to have to lock in a good rate before everything goes up, but is that time now? According to that graph up at the top, taken from BankRate.com, i’m thinking option #2 is looking like the best bet here. What would YOU do?


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