Interest rates, like summer temperatures, are beginning to climb steadily, and most economists expect the Federal Reserve to continue raising them in order to curb the threat of inflation. As a result, many borrowers are looking for fixed-rate loans to replace their HELOCs. Today's interest rates are still at historically low levels, so those who take out traditional fixed rate mortgages for 15 to 30 years can lock in great rates. And those rates will endure for the life of the loan, no matter how high rates on adjustable loans may go.
Rising Rates and HELOCs
If you hold on to a HELOC, the interest rate will move upward to keep pace with the rise in the prime lending rate. Over time, you may see the gains you reaped, thanks to lower closing costs, negated by higher interest payments. For that reason, if you originally planned to keep a HELOC for a significant period of time, now may be the time to look into converting it into a conventional mortgage.
Most HELOCs are regulated, so that they can't rise sky high. In North Carolina, for instance, the law prevents them from rising above 16 percent. And if you think that's still pretty high, consider the fact that in most states, they top out at a regulated rate of 18 percent. Interest rates may not climb that high anytime soon; but the risk of a HELOC during inflationary periods is not much different than the risk of credit card borrowing. And credit card borrowing is hardly ever an inexpensive financial strategy.
The Cost of Closing
Although a conventional mortgage involves closing costs, those fees can be packaged into the mortgage, or "rolled into the loan," and paid off over time. For those who are really savings conscious, it may be best to pay the origination fees now and avoid paying interest on them over time. Within a short while, the closing costs will be more than offset by the fact that conventional fixed mortgages will likely have attractive interest rates and lower monthly payments. And many of the closing costs and other payments associated with conventional mortgages are tax deductible, adding to their value over time.