Time to use my equity line?

[JWH]

I'm coming to the end of my 6.8% home loan, with only six years and $61,000 left to go on my mortgage. However, I have a home equity line of $250,000 with a current interest rate of 3.74%. I keep wondering if I should buy up my home loan with my equity loan. Should I be worrying about the equity loan going up over 6.8% in the next six or seven years? Does this seem like a frugal move? Thanks for any thoughts or advice!

[disneysteve]

What are the terms on the HELOC? Are there any limits to how the rate adjusts? Could you possibly get a fixed-rate home equity loan rather than use a variable rate line of credit?

[JWH]

Thanks for checking in. I know I've looked into the fixed-rate option before, and it definitely brings the rate way up, but I just searched B of A's website and it looks like I'll have to actually call them to get the going rate. Ug. The problem is, I hate to lose out on the 3.74% while I have the chance. I was thinking about watching the feds carefully and keeping the adjustable loan until the very last minute--before the rates start soaring again. Bad idea?

[disneysteve]

Personally, I would do the equity line deal. The rate would have to go up more than 3% just to get to the ridiculous mortgage rate you currently have (I wonder why you never refinanced that). Plus, if you drop the rate but keep paying the same monthly amount, it won't actually take you 6 years to repay the loan. You'll knock some time off of that. So even if the rate does climb, you'll almost certainly come out at least even and probably ahead.

[DavidKimball]

If the 3.74% interest remained there for the 6 years, you would save $7K in interest -- assuming a $1K monthly payment.

Warning -- Trying to time the market can get ugly in the end. At that time, the bank could get jitterish and jack up the rate.

For me, I would never do an ARM. Increase your current payment and by affect, lower your own interest rate by paying the mortgage off early.

David