Benefits of HELOC

Q: I'm 65 and retired.  I have small house mortgage in the form of a HELOC with an open interest rate.  I want to either go with a fixed-rate mortgage or a fixed-rate HELOC - there is such a thing, right? I need to keep the payment within a certain range, but I'd also like to do some much-needed home improvements (e.g. paint the kitchen and bathroom cupboards, replace flooring, paint and wallpaper, etc.), so would like to take out more money to cover this cost. While I do have some savings I could access, I would really prefer to keep them there to maintain a small cushion in case my alimony and pension come to an end, should my ex-husband pass on.  I am wondering which would be the best option: choosing a mortgage (30-year or 15-year) or opening another HELOC with a fixed rate.

- Linda, Phoenix, AZ

A: Home maintenance is an expense that a lot of folks don’t factor into retirement plans, but as you’re finding out, it is expensive. You have mentioned a number of “tools” available to get the job done! It’s nice to have options.

You’re right; a home equity line of credit (HELOC) usually has a variable interest rate, but they also have flexible repayment options. They are convenient because you can write checks as needed. In other words, you don’t have to use the entire amount for which you are approved and interest is only charged on the amount you’ve actually used. An important factor to consider is that many banks offer the opportunity to fix or lock-in the interest rate on all or a portion of the outstanding line balance for a period of time to allow for better budgeting and guard against rising rates. This period of time usually does not exceed the maturity date of the line of credit.

A home equity loan, on the other hand, will provide you with a fixed interest rate, amortized payments and an up-front lump sum of money.  Typically, they can be set-up for very little or no cost. On the downside, you have to borrow all the money at once and it can usually be amortized over only 15 - 25 years. If you refinance your current mortgage, you may be able to amortize it over 30 years. A 30-year mortgage would give you a lower monthly payment, but would require more money in that closing costs and fees would be higher.

Any of the home equity options will work well for you! Additionally, you can save money by applying online, because some banks knock a quarter percent off your interest rate if you do. As a retiree, Linda, you need to figure out what monthly payment works best in your budget and apply for the lowest overall cost alternative – which may not necessarily be the lowest payment.

Comments

[Jamie]

This is good advice. It is also important to note that some HELOC lenders charge extra when the borrower converts to a fixed-interest repayment option. Also, not all lenders offer that option - so, it's important to shop around.