Pay off HELOC with Cash-out Refinancing

Tuesday, Jun 27, 2006

Did a cold chill run down your spine the last time you checked the interest rate on your home equity line of credit? Borrowers with HELOCs are feeling a little jittery these days because rates are heading in the wrong direction-up. HELOCs are tied to the prime interest rate, which has been traditionally stable until this most recent upturn.

To make matters worse, many HELOCs don't have the caps that you find with the standard Adjustable Rate Mortgage (ARM) . ARMs generally have an upper tier to their rates, preventing the borrower from being locked into an absurdly high interest rate. HELOCs don't have that guarantee.

Solutions to rising HELOC rates

All this news may seem unsettling; but there are solutions if you're finding that the payments on your HELOC have become a financial strain. One solution is to transfer your short-term debt onto a long-term, fixed-rate mortgage. Here are a few reasons why a cash-out refinance of your first mortgage could provide you with the relief you need:

  1. Lower payment: Since first mortgages tend to have lower interest rates than HELOCs, and because you're refinancing to a longer term, your monthly payment may decrease. This may be advantageous if you're going through some short-term financial troubles.
  2. Less volatility: The best part about a cash-out refinancing is that you can lock in your rate and get a good night's sleep. No need to wonder what the Fed is going to do to the prime rate tomorrow-you're locked in.
  3. Ability to prepay: Just because you've refinanced, you can still prepay your loan. Simply by increasing your monthly mortgage payment and stipulating that the money goes toward principal, you can whittle away at your mortgage debt.

Most financial experts will tell you that transferring short-term debt into long-term debt isn't a prudent move. However, if you're feeling handcuffed by the rise in the prime rate, paying off your HELOC with a cash-out refinancing might be the realistic decision you need to make.

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