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I have a fixed mortage of 260,000 at 4.5%. I could refinance this loan to 15 years at 3%. I also have a Heloc with an APR of 3.25%. On the Heloc I have a line of credit of 95,000 and available credit of 62,000. I am considering taking 60,000 from the Heloc and pay towards the principal on my current mortgage and re-finance the remaining loan of 200,000 for 15 years at 3%. Does it make sense to do this? What are the pros and cons?

  • You'll have to close the HELOC if you want to refinance the mortgage. At least that's what they told me... – littleadv Jun 22 '12 at 21:16
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    How many years are left and what was the original amount of the mortgage? What is the home worth today? Is the HELOC fixed or adjustable? – mhoran_psprep Jun 22 '12 at 22:14
  • mhoran - exactly. need the other info. HELOCs are variable, never seen one not. – JTP - Apologise to Monica Jun 22 '12 at 22:44
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    What is a HELOC? Being from Australia I have never heard this term before. – Victor Jun 23 '12 at 0:14
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    @Victor HELOC - Home Equity Line Of Credit. That's where you use the equity in your house as collateral for a line of credit. – Patches Jun 23 '12 at 2:24
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You don't say what the time remaining on the current mortgage is, nor the expense of the refi.

There are a number of traps when doing the math. Say you have 10 years left on a 6% mortgage, $200K balance. I offer you a 4% 30 year. No cost at all. A good-intentioned person would do some math as follows:

  • $200K 10yrs 6% = $2220/mo x 120mo = $266,449 total payments left
  • $200K 30yrs 4% = $955/mo x 360 = $343,739 total payments left

Please look at this carefully. 6% vs 4%. But you're out of pocket far more on the 4% loan. ?? Which is better? The problem is that the comparison isn't apples to apples.

  • $200K 10yrs 4% = $2025 x 120 = $242,988 total payments.

What did I do? I took the remaining term and new rate. You see, so long as there are no prepayment penalties, this is the math to calculate the savings. Here, about $195/mo. That $195/mo is how you judge if the cost is worth it or the break-even time. $2000? Well, 10 months, then you are ahead.

If you disclose the time remaining, I am happy to edit the answer to reflect your numbers, I'm just sharing the correct process for analysis.

Disclosure - I recently did my last (?) refi to a 15yr fixed 3.5%. The bank let the HELOC stay. It's 2.5%, and rarely used.

  • In regards to your calculation "10yr @ 6%, and 30yr @ 4%" aren't you assuming he will make the minimum? Can't he continue to pay the same amount he would have at 6% and save 2% as a result? Or is there some rule I'm not familiar with? – Kirill Fuchs Jun 23 '12 at 8:36
  • Yes he could make payment greater than the minimum. It takes dedication, and a little work to make that extra payment. It will reduce the long term costs, but the numbers involved in the calculation (years left and value of the home) are still needed. The idea of a refi is moot if the loans are either underwater or almost underwater. – mhoran_psprep Jun 23 '12 at 10:44
  • @KirillFuchs - please re-read, the third calculation does exactly that. Shows the 'right' way to analyze. – JTP - Apologise to Monica Jun 23 '12 at 12:46
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There's several different trade-offs wrapped up in your question.

In general, refinancing a mortgage to a lower interest rate makes sense if you are certain you'll be living in the house for N years. N depends on your closing costs and points. Basically you need to calculate the break-even point for when the savings from the reduced interest rate exceeds the cost of the re-fi. When I refinanced, the broker did the calculations for me for a range of options, maybe yours could as well.

The trade off in selecting 30-year vs. 15-year is between monthly payment and total outlay. A 15-year mortgage will have a higher monthly payment, but the total money that is paid out the bank (rather than to your equity) will be less.

Using the Heloc to do the down payment seems sketchy; plus then you have two loan payments you're making each month. Why not keep it simple and look for a $250k loan with 5% down? Presumably with the current mortgage you already put in a good down payment, and have built some equity up.

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Unless I'm missing something, this doesn't make sense at all. Why take out money at 3.25% (the Heloc) to reduce the balance on a 3% loan (the refi)? It would be better to move as much from the Heloc to the refi as possible to get the best rate. If this results in a lower monthly payment, keep paying the higher payment and you'll be better off.

  • There are times that one wishes to "fix" the bulk of their debt, but keep some flexibility on the rest. Money paid early to a mortgage can't be pulled back out, but a HELOC lets you borrow when you'd like. The $60K at 1/4% higher costs $150/yr, along with the risk of rates rising, but OP might treat the HELOC as 2-5 year debt and be done with it sooner. – JTP - Apologise to Monica Jun 23 '12 at 18:22

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