Don't tap that HELOC

DEAR BENNY: We have a HELOC (home equity line of credit) at a current interest rate of 4.75 percent. We have not drawn on the account. We are 20 years into a 30-year home mortgage with a fixed rate of 8.75 percent and owe about $32,000. Our home is listed on the appraisal rolls at $306,000. We would like to draw on our HELOC to pay off our first mortgage. We understand that the 4.75 percent is not a fixed rate and will be adjusted monthly depending on the prime rate. We also understand that we must pay interest on it monthly and in nine years will have to begin repaying principal. There are no prepayment penalties.

It sounds too good to be true that we could pay off our 8.75 percent mortgage loan with a HELOC at a current rate of 4.75 percent. Are we missing something? --Barbara

DEAR BARBARA: You raise an interesting issue, one with a number of caveats. As you have indicated, your HELOC has a floating and not a fixed interest rate. Most of these loans have rates that actually change on a daily basis. There is no guarantee what the rate of interest will be one year, two years or eight years from now. I vividly remember back in the early 1980s when interest rates were hovering close to 20 percent.

You run a serious risk that one day in the future you may have to start paying more than 8.75 percent interest.

A second issue to consider relates to the tax deductions that you get from your mortgage interest payments. While this should not be a major deterrent in your thinking, you do have to recognize that you will get fewer deductions under your plan.

Another issue involves the terms and conditions of your HELOC. Unless you plan to pay off the entire first trust (mortgage) immediately, you run the risk that your lender may put restrictions on your HELOC in the future. I have a number of clients who have just received letters from their HELOC lender that their account has been frozen (or else the amount they can borrow has been reduced) based on the lower appraisal of their property.

Yet another concern is the fact that I believe that a HELOC should be used for that "rainy day." It's nice to have a checkbook in your desk drawer that you can use, if you suddenly are in need of additional cash. If you use your HELOC to pay down your mortgage, what will you do if you are suddenly confronted with that "rainy day"?

You have a very high-interest first mortgage. Currently, interest rates are very low -- in fact, almost at an all-time low. Instead of paying off the mortgage using your HELOC, why not consider refinancing and keep the HELOC as is? (The HELOC lender must agree to allow you to subordinate that loan to the new first, but usually that is not a problem.)

You have considerable equity in your house, and assuming that you have good credit, you should not have too much trouble refinancing, even in today's tight money market.

DEAR BENNY: I own the second floor of a duplex condominium. I pay 60 percent of the common expenses because my unit is bigger, while the owner of the first-floor unit pays 40 percent. Our building needs a new roof because shingles are blowing off, the remaining shingles are flaking and curling, and I had a leak in my unit.

I have gotten three estimates on reroofing (putting shingles over the existing shingles). The owner below me does not feel the building needs a new roof. She insists on seeing damage to my unit before she will agree to a new roof.

The previous leak has dried up, and there is no present evidence that there ever was a leak. Do I have to have damage to my unit before she has to agree to a new roof? How can I go about getting a new roof? --Carolyn

DEAR CAROLYN: The first thing that anyone who has a problem in a condominium must do is to review the legal documents, which are typically the bylaws and declaration.

What do the bylaws say about repairs? Are there any provisions for resolving disputes between the two of you? ...CONTINUED

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