Refinance existing mortgage or get a HELOC?

Guest

I recently changed jobs and went through a tough phase financially. I'm coming out of it, but dealing with repurcussions, including 20k of credit card debt at ridiculous interest rates (20's)

I have a 190k mortgage at 5.625% on my home going forward 30 years. My house is worth over 400k, possibly 500k. I bought this house from close family members who were happy to wait for their equity, in return for my assuming the current debts on the house. This family member is asking for around 30k of their equity in the house right now. (and wants another 110k in ten years, to settle everything)

I've been speaking to a mortgage guy. My two options are as follows;

1) Borrow 50k as an interest-only HELOC at 10.75% over 15 years. 10 years interest only. The rate is very high due to my credit and the lack of solid income history. I would pay this down by making "standard" mortgage payments plus extra principal, not just pay the interest and have a balloon waiting for me at the end of 15 years. I'm spending almost $800 per month NOW for the 20k debt, and paying down almost none of the principal.

2) Refinance entire mortgage at 6.75%, taking 50k extra cash back.

I ran some numbers, and found that when borrowing 50k, it was cheaper to borrow using the HELOC and keep my existing mortgage. The break even point was in the 60's, where it would be better to take a higher rate on the entire nut.

These were relatively basic calculations, however, and I'm asking you guys for the other stuff that maybe I'm not thinking of. For example, the interest rate on the HELOC can change. This could blow my calculations out the window should the rates go up. It's hard for me to quantify that. Keep in mind that I plan on paying the HELOC down within 8 or 9 years, and not 15.

Please try to keep responses out of the realm of "you're getting raped, i can get you a better rate." Not my question, really. Perhaps there are other loan options which I'd be willing to consider, but I'm relatively confident doing either as an alternative to what I'm currently doing.

colin · Posted: Thu May 10, 2007 6:12 pm Post subject:

I would say refinancing the present mortgage would be better than taking out a heloc with 10.75% which you can expect to rise. Also you plan to make standard plus extra principal payments then it is not much use taking out a interest only loan. And present rates on frms are lower than 6.75%. You need to check with few more lenders if they will qualify you for a better rate than this.

Do a cash out refinance, pay off the cc and 30k to your family member. Paying off the cc will help you cut out a major monthly expense.

Colin

Caron

Hi Guest,

Welcome to our forums.

In my opinion, you can refinance the entire loan at 6.75%. This will give you extra cash of 50K with which you can try paying off the credit card debts. On the other hand, if you go for heloc, it means you will be managing an adjustable rate mortgage and the rates may vary from time to time. There can be a possibility of rates going higher in future. So, you need to get prepared for it. I mean you should be financially sound enough to deal with the upward trend in rates.

Moreover, the interest rate that you're getting currently is also high. And, it's my belief that it is easier to manage one loan at a time rather than two at a time when currently there is a lot of credit card debt still awaiting payments, that too, at a higher interest rate. So, why not pay off the credit card debt using the extra 50K cash.

Good luck Smile

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