Here are four questions to ask in order to better understand your HELOC:

    1. What will cause the Prime index to go up?  The interest rate on your HELOC is determined by adding a margin to the Prime rate.  This means that your interest rate will go up when the Prime rate goes up.  The Prime rate changes whenever the Federal Reserve change their Federal Funds rate.  The Fed has indicated that they’ll be increasing the Fed Funds rate as the economy improves.  This means that as the economy continues to get better, the interest rate on your HELOC is likely to go up.
    2. What happens after the initial draw period?  Some HELOCs turn into amortized mortgages after the initial draw period.  This means that your monthly payment would probably go up dramatically from where it is now if you are currently making interest-only payments.  Other HELOCs must be paid off after the initial draw period because a “balloon” payment will be due.  It’s important to find out if you can keep the HELOC (albeit with a much higher payment), or if you’ll be forced to refinance or pay off the HELOC at the end of the initial draw period.
    3. What would be my blended interest rate if I keep the HELOC?  Your blended interest rate is determined by your total interest expense on all of your loans.  For example, assume you locked in a very low mortgage rate on your first mortgage.  Is it really worth it to have two loans instead of one if your HELOC will be re-amortizing and the interest rate is likely to go up?  You may want to consider whether you can combine the two loans into one and walk away with a lower blended interest rate on both of your loans combined.
    4. What would be my total monthly payment if I keep the HELOC?  There will likely be a cash flow difference one way or another if you keep the HELOC or if you combine it into your first mortgage.  The extra cash flow can be used to invest or pay down principal.  The only way to find out is to ask the question!

    Contact me so that we can further explore any/all of these ideas together.


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