Mortgage risk determined by rates, terms

Future-Proof: Navigate Threats, Seize Opportunities at ICNY 2018 | Jan 22-26 at the Marriott Marquis, Times Square, New York

(Final part of a two-part series. See Part 1: Real estate loan may lack payment protection.) Last week's column pointed out that home equity loans (HELs) are very attractively priced in the current market. This is why many borrowers are tempted to refinance out of their existing fixed-rate mortgage (FRM) or adjustable-rate mortgage (ARM) into a HEL. I also warned that HELs are the riskiest of all ARMs because they don't have the protections against severe payment shock – a sharp and sudden increase in the mortgage payment – that other ARMs have. Whether the risk is worth taking in any particular case depends primarily on four factors. The first is the rates at which you can borrow. The larger the spread between the initial rate on the HEL and the rate on the alternative mortgage, the stronger the case for the HEL. The second factor is how long you expect to have your mortgage. Since the HEL rate is lower at the beginning but could be higher later on, the shorter the pe...