Should I lock the rate on this HELOC?

March 4, 2009 3:28 PM

Financially talented MeFites, please tell me whether I should lock the rate on this HELOC.

Okay, I will try to lay it all out here, but I may miss something--I'll stay close by to provide any additional information that may be needed.

I have a HELOC that works like this: for the first ten years, the line of credit stays open, and I pay interest only. The interest floats but has a floor of 4.0% (keyed to the prime rate), which is what it is at today (my payment is $78.86). My payment will never be lower.

At any point I can lock the rate, at which point it will convert to a 15-year fixed mortgage, and the rate will be calculated thusly: 3-year T-bill rate + 4% + .5% margin. So if I lock today, my rate will be 5.92%, and my payment will be $215.53. There is no floor for the rate lock.

I know nothing about this type of thing. Is the 3-year T-bill rate likely to go lower? Is the prime rate likely to stay where it is? Should I just go ahead and lock now?

Thanks!

posted by HotToddy to work & money (4 answers total)

Umm, T-bills can't get much lower. They're barely registering as it is (well under 1% at the time of posting). Interest rates may well stay here for a while, but they're about as low as they can possibly get. You need to decide for yourself whether you want to continue to draw down your line of credit or not (if you do, don't convert to the mortgage), but if you're ready to start paying it off, interest rates can't realistically get any lower.

Prime is linked to the federal funds rate, which is 0.25% at the moment, again, about as low as it can go. If you're looking for an opportunity to lock your rate at the lowest rate possible, now's probably the time.
posted by valkyryn at 3:35 PM on March 4, 2009

The use of money for 15 years for 6% interest is a pretty darn good deal in absolute terms. Even if the rate goes negative, you aren't going to save more than a couple percent. Were it me, I'd lock it down and, if the rates do somehow drop further, count the extra money every month as an insurance premium.

If rates go down, you lose a little. If rates go up, you win, possibly a lot. Your potential upside is much, much higher than your potential downside.
posted by Malor at 5:20 PM on March 4, 2009

Rates are already close to zero. Lock-in and pat yourself on the back for securing credit at such a good rate during these rough lending times.
posted by Civil_Disobedient at 6:06 PM on March 4, 2009

From your numbers it sounds like you only have two or three thousand dollars on your HELOC. The best thing to do is keep your current rate and pay off the debt as soon as possible. In a flat or deflationary economy the last thing you want is to be holding debt. You can keep the HELOC open in case you need emergency cash, but don't carry a balance.
posted by JackFlash at 6:36 PM on March 4, 2009