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February 2, 2009
fixed vs variable rate question
There was a great discussion here about a year ago about fixed vs. variable rates on a HELOC. I was hoping for some updated input and comments.
I have a Bank of America HELOC in which the principal is slightly larger than the cost of the first mortgage. About three years ago, after spending it down on renovations, I switched from the variable rate (prime minus something) to fixed (6.85%) as the prime rate increased. Yearly,we pay 1/25th of the principal (following the time line of our first mortgage) plus the fixed interest.
That strategy has worked well for us the last few years, but now that the variable/prime rate is so low, I'm wondering if we should switch back. BofA lets us switch back and forth pretty easily (so there are no refi cost implications). The catch is that the current fixed rate is higher than what we pay now (8 to 9%).
Should we gamble on a variable rate? Are folk's sense that prime will stay below the average fixed rate mortgage rates like they did in the early 2000s?
I'd really appreciate this community's thoughts!
Comments
Nobody can tell you what prime will do in the future. If you can take advantage of a lower interest rate to pay down the loan faster, it could be a good gamble.
On the other hand you don't want to be stuck without an exit strategy if the prime does what it did from 1976 to 1980 (when it went from 6.25 to 20.5%).
http://mortgage-x.com/general/indexes/prime.asp
Posted by: Bklnite at February 2, 2009 1:05 PM
We are in the same situation and it kills me that we could go from paying 7% to 3% if we switched over to the variable rate HELOC from our current fixed rate HELOC. However, we decided in the end that it is just too much of a risk in these chaotic economic times. Right now the government is doing whatever it takes to solve the economic crisis, inflation be damned. Once it has the crisis under better control they will worry about inflation and when they start worrying about inflation they will raise rates again and we don't want to be stuck in a variable rate when that happens. Who knows how long this will all take and we could be saving thousands of dollars a year in the mean time, but seems too big a risk for us.
Posted by: Left Hook at February 2, 2009 3:28 PM
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