If ARM ain't broke, don't fix it

Q: I just got a letter from my mortgage lender offering me a 6.5 percent fixed interest rate on my home equity line of credit balance, which is right around $100,000 and is the only debt I have on my $500,000 home. My family and friends think that's a great rate, and are urging me to fix it.

My hesitance is that my current interest rate on that line is in the 2 percent range and it has never been higher than about 5 percent in the several years I've had the loan.

A: Author Erica Jong once said, "Advice is what we ask for when we already know the answer but wish we didn't." Reread your question and you'll see what I mean.

Mindset Management

There's always the fear that if you don't take advice you've been given by different people, you'll be making a mistake. Or perhaps you're wondering if there's something you're not missing that everyone around you knows -- that's also a very common human psychological tic -- to assume that the popular opinion is necessarily correct. But if we've learned nothing from the last few years, we should have learned that the popular course of action -- especially when it comes to real estate, mortgage and personal financial decision-making -- is very often, in fact, not the smart course of action for everyone.

But let's get down to why you're being given this advice, and how to really approach making this decision. Some folks would just say that it's a no-brainer: Keep your loan.

Others always prefer fixed to adjustable, but in your situation, to "fix" your home equity line of credit (HELOC) would be to sign up for a more predictable, but almost certainly higher monthly payment than what you're currently paying. That just does not make good financial sense, in my opinion.

There are a number of reasons why your friends and family are advising you to do this, though. And there are also a number of ways to systematically assess the risk of continuing with an unpredictable interest rate and payment on this loan.

Need-to-Knows and Action Plan

Human nature is to make verbal shortcuts, which often result in corresponding mental shortcuts. Since the crash of the subprime mortgage market, many people made the verbal shortcut of referring to subprime loans as adjustable-rate mortgages (ARMs). While it's true that many predatory and/or unwise subprime mortgages were, in fact, ARMs, the worst and most foreclosure-prone of these had several dramatically bad characteristics to them, which had little or nothing to do with the fact that they had an adjustable interest rate. ...CONTINUED

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