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I have $5k left on a primary mortgage at 5.375% interest. I have $155K debt on a HELOC at a variable 3% rate. The total line of credit approved is 200K. 3.0% APR. No penalty for pre-pay. Can lock into a fixed rate at any time. 10 year Draw period ends in 2016.

Does it make sense to refinance to get a lower fixed rate and switch the HELOC to a fixed rate?

One goal is to lower monthly payments. Currently am paying additional principal of $375 month on HEOLC.

The home is worth $350K. FICO score is 739. Plan to stay in home long-term (25Yrs. +). Country =USA

I'd really appreciate some guidance and expertise about this before approaching bank.

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  • Good question. How long do you plan to live in the house? Could you also tag the question with your country? Any details you can provide help get you a better answer. Thanks for stopping in.
    – MrChrister
    Jan 19, 2013 at 7:09
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    Also, is the 155K is the HELOC credit limit, or the actual debt? What's the HELOC terms?
    – littleadv
    Jan 19, 2013 at 7:14

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There are some tricky aspects to what you propose. Home equity loans, to the extent they are not directly attributable to the acquisition or improvement of the home, are limited to deducting the interest for the first $100K, but no more. Unless this was the case for your HELOC, this limit applies to you and would apply to the refinanced loan as well.

I'm compelled to ask, do you feel lucky? A HELOC is tied to the prime rate (usually) and it can go up over time. Personally, I'd seek out a low to no cost fixed rate mortgage, 30 years, if you wish, and fix the rate. At 4%, the payment would be $740. Right now, the interest and your $375 principal would add to $762.

This answer helps you fix the rate, but lose the flexibility you'd otherwise have through 2016.

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  • Thank you JoeTaxpayer for your response. My HELOC is tied to the prime rate. If I watch that closely and it starts going up, then I could convert to the fixed rate. Does that make sense? If I fix the rate, is that considered a new mortgage? or a fixed rate HELOC? If it converts to a mortgage loan, are you saying that I can deduct the full interest; unlike the limit of first $100K if it stays as a HELOC?
    – MAJ
    Jan 19, 2013 at 19:36
  • What you said sounds ok, just watch the rates closely. Non-acquisition debt is limited to the $100K whose inter you can deduct. How did the current HELOC come to be? It may be fully deductible depending on its paper trail. The status should follow to the new loan. e.g. you confirm $155K was from a renovation, refinancing the outstanding amount is still fine. Make sense? Much more, and I'll edit in the answer to clarify for you.
    – JTP - Apologise to Monica ♦
    Jan 19, 2013 at 20:25
  • Uh-oh. Does it make a difference that it is a HELOC secured by home? I believe I took the full interest as a deduction on taxes last year. Part was used for home improvement/part for graduate school. I can't find anything in orginal contract about deductible interest. My assumption is that a fixed rate refinance is safer than a variable HELOC. ANd if I can get my monthly payments lowered too; that's two pros to approach the bank about this. And then if the refinance also lets me take all interest as deduction that's 3 good reasons to move in that direction . Con is no LOC.
    – MAJ
    Jan 19, 2013 at 23:18
  • @MAJ you won't find anything on the deuctability of the interest in the loan documents, its how you use the money. You have to have your tax adviser go over your expenses funded with the loan and see what can be deducted, and what cannot.
    – littleadv
    Jan 20, 2013 at 0:46
  • If you have paperwork to show $55K in home improvement, you're all set.
    – JTP - Apologise to Monica ♦
    Jan 20, 2013 at 3:03

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