So we took out a HELOC about 2 years ago. IT’s a variable interest rate and the payment has skyrocket siince rates went up. We owe about $40k on it. Should we take out another fixed interest loan with a lower interest rate to pay it off? Thanks.
So is your issue the fact that the payment has gone up, or that you are now paying more interest on the money you borrowed? At this point, it seems that the rates are near the top of where they are expected to be: CME FedWatch Tool - CME Group with maybe one more 0.25% increase, and a greater than 50% likelihood that rates will start dropping by September.
Have you investigated what rates you could get a fixed rate loan at, at what it will cost you to get that loan? Refinancing into a new fixed 2nd mortgage will likely be at 6% - 8%, if you can find one. Unsecured (personal) fixed rate loans range from 7% to 25% Softpull | Discover Personal Loans on one of the few sites I could find that offer them.
On the other hand, once rates start dropping, the rate on your HELOC will also start dropping, along with the payment. That said, I would strongly suggest that you keep paying more than whatever the highest payment on your HELOC ends up being so that you can pay it off sooner.
Thank you very much AJ. Both the money borrowed is costing more and the payment is more. Maybe we should just send 30-40% more than the minimal payment required each month.
The other option, if you have $40k in cash deposited somewhere, is to pay it off. If the current rate is 7%, that means you will get an equivalent 7% yield on that 40k versus maybe 4-5% where it is now.
Yes, if you have the cash flow available, it would have been advisable to do that even before rates started increasing. Paying minimums on variable rate loans when rates are low is tempting, but then you end up paying a lot more than you would have when rates do increase. Continuing to pay minimums when rates start increasing, if you have the cash flow available, is throwing money away. And it was always clear that rates would not be able to stay at the historic lows where they were a couple of years ago. So that was a tactical mistake on your part. However, just like with planting trees, the 2nd best time to start paying extra on variable rate debt is today. As @MarkR indicated, any extra cash that you have (potentially even including some/most of your emergency fund) should be put toward paying down the HELOC. If an emergency happens before you are able to pay off the HELOC and refill the emergency fund, you should be able to run the HELOC back up again - although I would caution against doing so before making significant other cuts in your lifestyle.