How to convert HELOC to fixed rate loans? - Posted by Dru

Posted by Patrick on March 21, 2006 at 22:34:01:

I sent you a message by email. Talk to you soon.

How to convert HELOC to fixed rate loans? - Posted by Dru

Posted by Dru on March 21, 2006 at 22:26:46:

I have 3 properties with a conventional 30 yr fixed for the first and HELOCs on the second. As the interest rates go up so do the payments on the HELOCs and they are eating up my cashflow every month… I have at most 10% equity on these properties… I’d like to know how I can turn these into a fixed rate loan or if you have any ideas as to how I can keep the payments same every month and not have to worry about the rate hikes, I’d like to hear your thoughts!!

Re: How to convert HELOC to fixed rate loans? - Posted by John Corey

Posted by John Corey on March 22, 2006 at 05:51:01:

Slow down a minute and do the math after you get some market quotes.

When you convert you are likely to have transaction costs and maybe a higher rate. Lenders tend to offer a higher rate on the fixed loans as there is a bit of interest rate risk for them (if they buy a hedge they are paying to remove the risk so a cost that is passed to you).

Do the math and see where you stand. Take today’s rate for the HELOCs and plug in some higher interest rates to see just how bad it can get. See if you can get some estimates for what rates are likely to do. The market has already made predictions when they priced the longer term loans so there is data.

When you look at the present situation and how it might, I repeat, might change over the next 2-5 years you see just what it might cost you. You also can try to project rents if you want to really look at the cash flow.

Then check the costs of a refi and the likely rates you might pay there. If there are pre-payment issues if you sell then make note of it but I would not really build that into the comparison.

I do not know what you are looking at (present HELOCs vs. a fixed solution). I do know that you might need some rises in the present rates before the costs of a refi are balanced.

At a different level you need to get your emotions in check when it comes to rising interest rates. Rates change all the time. We were in a period of lows with a 40 year low hit at some point. The implied message was it was likely that only up was in the future. Now that we are at the present levels how much more will the rates change? Are we expecting the Fed to move past 5%? How about past 6%? Mortgages tend to be based on the 10 year debt while HELOCs track the short term (Fed) rates more closely.

Locking might be a great idea. Just know what you can afford to spend to get the job done. Even if someone offers you a solution with no costs out of pocket their fees and such are built into the deal somehow (higher rate, pre-pay fee, etc).

There is a plus side. If interest rates rise and fewer people are rushing to buy a home you should see a stable or rising rental market. If rents rise then you may recover some of the difference.

John Corey