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 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.
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.
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.