Refinance vs Home Equity Loan vs Equity Line of Credit

[Anonymous]

We have been in our house a year now and are on a $93,000 40yr mortgage at 5.75% payment. We need $30,000 to do home repairs.2 Banks told us to do a Equity Line of Credit and not refinance but just pay our current mortgage payments to a 30yr schedule.

Our bank is offering us the Equity Line of Credit for $30,000 at a 5.45% adjustable rate.  To pay it off within 30years we'd need to pay around $175 a month.

I get this sense that this is a bad deal as if the economy bounces back in 5-10 years our rate could almost double for the Equity Line of Credit.

I see  sites like quickenloans.com saying we can cash-out refinance at around 5.15% 30yr fixed rate mortgage and payments with taxes and insurance would be $850 /mo.

Right now to pay tbe 93,000 on a 30yr plan at 5.75% with taxes and insurance we are at about $720/month.

Our house is worth around $155-165,000.

If we refinance we have to pay $2,200-3,200 in closing costs.. but I wonder if that still would be way cheaper?

Any input is greatly appreciated

[Lel]

Like you have correctly surmised, interest rates on HELOCs will eventually go up.  As the economy recovers, the Fed is going to start tightening, and they may be quite aggressive about doing so.  The Fed just announced that for now they're going to stand pat on the Federal Funds rate (which dictates the Prime Rate, to which the interest rate of HELOCs are tied).  But the last time I checked, the Fed Funds futures were predicting that rates would start increasing by the end of the year.

The HELOC that you were offered is Prime + 2.20%.  You might want to shop around for a better margin, if you want to go this route.  But since you're looking at a relatively low-limit HELOC, the margins might not get significantly better.

Have you gotten a quote for a fixed-rate home equity loan?  Interest rates on these sort of loans are almost always higher than HELOC rates, and are sometimes considerably higher than prevailing 30-year mortgage rates.  There are closing costs for home equity loans (HELOCs often have no closing costs), but they're not as high as a primary mortgage's costs.

Going with the cash-out refinance might be the better move in the long run.  You'd be able to get a lower rate (lower even than your current mortgage).  Plus, if you possibly afford to reduce your term to 30 years, you'd save a ton of interest payments in the long run.

$93,000 at 5.75% over 40 years results in $145,000 in interest payments.

$123,000 (your cash-out refinance) at 5.15% over 30 years results in $119,000 in interest payments.

You'd build equity faster by choosing a short-term product, even with the extra $30,000 in home improvement debt.  But you'd have to be able to make the higher monthly payment.