HELOC refinance or merge loans?

2 Replies

I have a mortgage loan for 703K at 2.875 interest (7/1 ARM, still 6 more years left) - I am paying $2988
I have HELOC for 90K at 5.25 variable rate, i am paying $370 per month (interest only)

I have two options now
1. Merge these two loans into one and get rate of 3.125 for 5/1 ARM, my new monthly payments will be $3420
2. Refinance only the HELOC for fixed rate at 5.09 interest (for 10 years), new monthly payment will be $958 (principle and interest). Then my combined monthly payment will be $3946

If i choose option1, i will pay $117,500 in next 5 years and this is all tax deductible. I will have to pay $2200 closing cost. So, total amount is $119700
If i choose option 2, i will pay $95,715 interest on first loan + $18,195 interest on the second loan ($113910 combined interest). Only $95,715 is tax deductible.

So, the difference between two options is, i will be paying $5790 more if i go for option 1.

Now, the question is am i going to save more than $5790 in 5 years in taxes if i go for option 1 considering we fall in high tax bracket?

Important points to note:

  1. Currently we do not have tax deductions on second loan, we never know if this will change in next few years. If it changes option 2 seems to be more beneficial
  2. If i go for option 1, i will loose the 2.875 interest rate for the entire loan, as well as i will loose that rate for the sixth year too. If i go for option 2, i can have 2.875 interest rate for large loan for another 6 years.

Please let me know your thoughts

@Sai Raj I would fix the heloc and keep where you are on the 1st Mortgage. Under new tax law you can only write off your first 500k in interest on the mortgage anyways as of right now. It may subject to change in the future. If you pay it off in 10 years you will be paying mostly principle on the HELOC as well. Hope that helps