Thursday, November 5, 2009

HELP!!!! It's Decision Time!

I know I've already expressed my fear at the thought of interest rates rising. Last month, I even blogged about developing a plan to convert the HELOC to a fixed-rate for my peace of mind in case the finance gurus predicting inflation and high interest rates are right. Even if we don't see double-digit rates again, it seems kind of silly for a rational, otherwise logical-thinking person to hope that interest rates would remain at historic lows for any extended length of time.

So now that an answer has seemingly dropped in my lap, why does it scare me so much?

And yes, I'm talking about the HELOC. That $86K balance on the line of credit tied to our rental property. The one with that enviable rate of prime minus one-half (currently 2.75%).

My late MIL's home is set for closing at the end of next week, and I think with our proceeds (after splitting with all the other siblings) we'll be able to knock the balance on this one down to the $45,000 range...which is less than half of where it started. I want to jump for joy since that will actually pull the property into a positive cash flow situation. Even letting me build up a little more savings for the inevitable repairs and maintenance all properties have.

So wouldn't you know it? My HELOC lender sends out this offer to convert all OR part of your LOC balance to a fixed 4.99% rate amortized up to 15 years. No hassle, no re-applications, no appraisals, just a $100 set-up fee. I called the toll-free number today, and they said I would just need to stop by the local bank branch to sign an authorization. And, as part of this special offer, they're even going to throw in a $500 Visa Gift Card if I do this before the end of November!

But arrrgh...that means I have to pay 2.24% more in interest each month plus the principal portion since it will be on a 15-year amortization. I know (or at least I think) it's the right thing to do, but it means my payment will actually go up $150-160 from what I've been paying these past few months instead of being cut in half. That means I'll need to continue to fund this property each month until the first mortgage is paid off in exactly 46 more payments.

Does this sound like the perfect answer to my dilemma? As I've typed this out, I think maybe it is (and oh my, someday I'll have to tell you about all the coincidences that led us to our current home---definitely a God-thing). The offer arrives within the same time frame that the balance is reduced using the money from the sale of MIL's home (fingers crossed for getting everyone to the closing table). There are no significant closing costs so it wouldn't feel like I wasted money refinancing it if we decided to sell the property when our tenants' lease runs out. When and if interest rates start rising, I KNOW I'd sleep better with the assurance of a fixed payment that is actually paying off principal too!

I'd love to hear your opinions. Is this the right thing to do?


  1. I am a little confused - so you will close on MIL's property before the refinance? Leaving only a principal of 1/2 of what it is now, but double interest. And your payment will go up? It seems to me that payments should not go up.

    I think I would do take this offer, but definitely not until after the sale of MIL's home, to insure that I lock in the lowest payment possible. I wouldn't want to spend the next 7-10 years paying a higher, more cash flow strapping payment and regretting my decision. Of course, I tend to mentally torture myself.

    I think this will be a great decision for you.

  2. Yes, the closing for MIL's home is set for one week from today. I have until the end of November to sign up for the LOC conversion.

    And the payment will actually increase because of the required portion to pay towards principal. Right now the only required payment each month is interest. Thanks for the confirmation. It will make things even tighter for the next 4 years until I get that first mortgage paid off, but I do think it's the right decision for the long-term. It's just hard to accept an increase in my fixed monthly payments in an already tight budget.

  3. Hmm... I'm also trying to wrap my brain around it. Sorry that I've come in late.

    Have you been paying interest-only payments? Or at least... are you saying that they only require that you pay the interest portion of the payments? And the interest is only 2 point something percent right now?

    I am not familiar with HELOCs or any kind of LOC, obviously. I understand installment loans; we have one.

    Also, can you pay extra at any time without penalty? As in, pay the loan off at an accelerated rate (maybe even pay a giant chunk off at once as you are thinking of doing) and simply save interest and shorten the life of the loan?