Rates v. Risk: HELOC & ARM loans May be The Solution
Mortgage rates are always a hot topic, and with good reason. A mortgage is likely the most significant financial commitment anyone will ever make.
So, it's only natural to pay attention when rates start to climb, as they have been doing in recent months. Fun Fact: Although everyone is very concerned about their rate during the home buying process most Americans forget their rate one month after closing.
I want you to take a deep, cleansing yoga breath; keeping things in perspective here is essential. While rates are indeed on the rise, they're still relatively low by historical standards, especially compared to the pre-pandemic years.
Some homeowners are taking advantage of this by cashing out on the equity they've built up in their home. In fact, I've been running into clients with great rates – around 2.875% – wanting to cash out NOW but are hesitant to lose their great rate.
Get the facts on how to keep your interest rate without giving up much equity.
What is a HELOC, and When Does It Make Sense?
Let’s take a look at a client story as a perfect example of when a HELOC makes sense. This client, let’s call him Bill, had a 680 credit score, 5% down, a rate of 5.625% has a lender credit for closing costs and prepaids of $3,098.98
One of the ideas I had for this client was a home equity line of credit (HELOC): a home equity loan that allows you to draw funds as needed and repay the money at a variable interest rate.
When I priced a HELOC for him, we found that the potential payment would have been more expensive than the payment that came with simply refinancing at a rate of 5.375% -- the most current rate at the time*.
If my client would have done a cash-out refinance on the first mortgage and received $100,000, the monthly payment would have been $1549.83.
Once we calculated the HELOC option (with an extra $50,000), it would be an extra $682.18 per month, making the total housing payment $1,451.29. In short he would haveincreased his payment by $98.54 more than if he had refinanced.
*Most current rate as of this publication (June 26, 2022)
» See The Itemized Fee Sheet
Sometimes Risks Can Be Worth It
During this time, we also discussed that a HELOC is interest-only for 10 years and then turns into a 20-year amortized loan. The HELOC is also adjustable, so the payments can change.
We then decided that the risk of the HELOC to get the funds he needed was greater than the current rate of 5.375%. Sometimes, risk is worth it, especially in today’s market.
When Taking a Risk Makes Sense
1.) The HELOC
When you're looking for a flexible and affordable way to borrow money, a HELOC can be a great option. Here are some of the reasons why a HELOC could work for you:
- You want more flexibility.
- You already have a reasonable mortgage rate.
- You plan to use your HELOC only for tax-deductible home improvement projects.*
* Contact your CPA or trusted tax advisor
2.) The Adjustable-Rate Mortgage (ARM)
Here’s another option for you: adjustable-rate mortgages. Adjustable-rate mortgages (ARMS) are making a comeback, and the rates are much lower.
ARMs are usually fixed for 5, 7, or 10 years. For the first few years, you will have a low fixed interest rate. After that time period is over, the interest rate may change depending on market conditions.
This mortgage can be a good option for people who are not planning to be in their homes for very long. This option could also help you save money for a while.
Need More Info? Reach Out Anytime!
If rates have increased since homeowners originally got their mortgage, as has been the case recently, refinancing at a higher rate may not make sense. It could cost more in the long run.
Either way, we’ll find the best way to refinance your home, whether it is through a HELOC, an ARM or any other mortgage choice. I’m here to help you every step of the way.
I'm a licensed mortgage broker serving Arizona, California, Colorado, and Florida. Reach out to me anytime at 480-313-7103 or sam@mindfulmoneyusa.com.
* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.