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As mortgage rates plunge, HELOC refinances beckon

Posted by  on Oct 21, 2014
 

You may not be accustomed to feeling sorry for investors, but, right now, they have real problems. With the world in turmoil from various threats -- from ISIL to Ebola -- there are few safe places to stash their billions.

Still, their loss is your gain. They are putting their money into the American home loans market, a traditional haven in troubled times, and the simple law of supply and demand is driving mortgage rates down as the cost of borrowing plummets.

Current mortgage rates

Indeed, the net effect is that costs are being driven down steeply. Average rates for 30-year fixed-rate mortgages (FRMs) hit a 16-month low last week, falling 12 basis points in just those seven days to end up at 4.05 percent, down from 4.17 percent. Points held steady at 0.14. The average for 15-year FRMs also fell substantially to 3.36 percent (and 0.10 points) from 3.45 percent, while the 30-year 1/1 adjustable-rate mortgages hit 2.62 percent, with 0.15 points, down from 2.68 percent. You would have to go back years to find that last rate equaled.

Our live database of current mortgage rates can help you find the best mortgage rates in your area.

HELOCs and the need to refinance

All this is welcome news for consumers with home equity lines of credit (HELOCs), providing they have sufficient equity in their homes for a cash-out refinance deal. That is because it gives them an opportunity to pay down those balances in one fell swoop.

Of course, this may not bother in the least those who have, in the 12 months ending June 2014, been among the 797,865 American homeowners who originated HELOCs nationwide, according to an October study from RealtyTrac. But it might be critical to those -- now facing payment shock -- whose HELOCs are currently seven, eight or nine years old.

HELOC hell for millions

Back in August, Big Three credit bureau TransUnion revealed a gaping $79-billion hole in the HELOC market. That's arisen because most of these lines of credit are divided into two bits: the "draw period" and the "end of draw" (EOD) period. And most EODs kick in after 10 years.

During the draw period, you have to repay only the interest on your HELOC, and, if that's a problem, you can draw down on your line of credit to cover any shortfall. So, to use a TransUnion example, imagine people who borrowed $80,000 at 7 percent in the mid-2000s. For the first 10 years of their loans, they had to make monthly payments of just $467, and they could use their lines of credit to cover that.

But, once they reach their EOD, everything changes. And not in a good way. Suddenly, they have to pay down their principal debt (the amount they borrowed) as well as their interest. And they can no longer draw down on their HELOCs to cover that. So, once the EOD date arrives, they have to find $719 every month -- out of disposable income.

Refinance your HELOC

If you have a looming EOD, you might now be exploring options to refinance your HELOC, a process that can offer multiple advantages. Current mortgage rates make a cash-out refinance of your home loan attractive. For most who have sufficient equity in their homes, it's a no-brainer.

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