I posted a bit about this on another thread but starting this as I have more questions.
I have over 120k in home equity. I don’t want that much. I want a line of about 20-30k. Partially to pay off a high-interest credit card (the charges on here are related to non-covered medical expenses that have just slowly piled up) and partially to have in case anything goes wrong with my to-be pregnancy next year.
We have 2 steady incomes and we’re not at all worried about making the payments. Even if something catastrophic happens and I have to drop out of my phd program, we still have enough on one income to make all of our basic payments for everything.
I’m going to talk to my credit union sometime this week as they seem to have the best rates. What are some things that I should ask/make sure of?
You need to determine if you have to take a certain amount at the beginning or if you can just leave it in abeyance until you need it. You need to determine if you want a fixed rate or a variable rate. You want to avoid a prepayment penalty.
You might also consider a refi depending on what your current rate is compared to what you can get on a HELOC. If you can lower your monthly payment, you can use that to pay off the credit card or you can take a bit extra on the mortgage to cover the bills you want to pay.
Ask if there are any costs or fees, there usually aren’t. Credit unions generally have very good HELOC rates, though I’d still look around a bit. We like to get HELOCs through our bank, to be connected to our checking account…however, same deal if you bank through your credit union. Ask what discounts they give…for example, we get a discount for payments automatically deducted from our account, line over a certain amount, things like that. Think we end up actually getting 0.5% less than the advertised rate.
Interest rates will be described similarly to that of mortgages, eg “index + x%” where “x” represents their margin. IIRC our heloc was basically at the index (e.g. Prime, Libor, etc), with 0% margin but it’s more common to have some margin.
There may also be a period where the repayment is interest-only, eg for for 5-7 years. I’m in favor of that for a HELOC as it gives you the flexibility pay off the principle when it’s convenient but of course that’s assuming the borrower is financially responsible and can handle larger payments when the principle-repayment period starts. Also make sure there’s no pre-payment penalty as mentioned above.
You may also want to wait until Jan to see how the tax bill shakes out. It might end up that mortgage interest is deductible but HELOC interest is not, in which case a refi might make more sense (but that comes with thousands in closing costs, so you’d have to do a little math to see which is better).
Right. We considered a refi but our rate is currently really good (just under 4%) and it was a huge PITA last time because they didn’t know how to judge stipend income. It’s just not worth the headache and additional costs right now.
Actually, on that note, a question for the future: when I bought the house, Mr R and I weren’t married so his credit didn’t come into play (He was in between jobs at the time and I had much better credit). If I refinance, i assume that since we’re married now, they’ll take into account both of our credits and income, yes?
He’s got good credit now. He just had basically no credit at the time.
A couple of things.
His credit only will come into play if he is listed as an owner of the house. If he is not an owner, he can’t claim the equity.
We often held a HELOC (without borrowing against it most of the time) for the reasons you describe- insurance buffer. Unexpected expenses or large purchases, or temporary loss of income and you can still pay your bills.
After the set-up we only incurred costs if we used it…and paid that back asap.
There can be a lot of variation between different HELOCs, so you will want to shop around. Who has the best deal changes from month to month as banks and credit unions run promotions.
the draw period (the amount of time you can take money out) can vary. I think it is typically around 10 years, but I have seen shorter and longer periods.
the repayment period can vary, I think 15 years is pretty typical but again I've seen shorter and longer periods.
generally there should be no application and closing fees. Sometimes they will charge you an appraisal fee, but you can probably find HELOCs that avoid this.
typically the sum of your current mortgage balance + the credit available through the HELOC will not be allowed to exceed 80% of the value of the house. I've seen some that have a 70% limit. That will put a cap on how much of your equity you can tap.
the higher your line of credit, the better interest rate you will get. So even though you only want you use $20-30K, you might be better off getting a $50K line or higher. Some places may not want to give you a HELOC for such a small amount as $20-30K.
some HELOCs require you to draw a certain amount at the closing, and have that balance for a certain amount of time, like 3 months. If you don't want to tap it right away, make sure your HELOC isn't like this. Or, plan to pay it back in a few months and eat a few months' worth of interest (it's basically a back-door way for the bank to recoup some closing costs).
some HELOCs will offer a teaser rate or a lower rate overall if you agree to open a checking account or make automatic payments or whatever. You have to decide if you are willing to deal with this to get a lower rate.
HELOCs always have a variable interest rate, IME. Make sure you find out how often the rate can change, what the caps (maximum and minimum rates) are, and what the index is. To get a fixed rate you would be getting a home equity loan, and that is a different beast. I've seen maxes as high as 18%, which is a mortgage rate we haven't seen since the stagflation days in the 70's, but it's something you want to know in advance.
I had a HELOC once that had a minimum amount you could write a check for, I think $500. Others haven't had this limitation.
Our HELOC is there if we need to take it, so we’re not paying anything on it on a regular basis. Ours had a 10 year repayment period. Our rate was about 4.5% – haven’t touched it in 6-7 years, so it may be lower. We get a lower rate if the bank automatically pulls the payment every month. We did that and then threw extra it via electronic transaction. We had a minimum $500 draw, too.
We used ours to pay a portion of S2’s college expenses after I was unable to work following my heart attack. Everything I made had gone to EFC.
When we have a HELOC balance, that is the first thing that gets paid! We find that even paying a low interest rate is great incentive to killing it off, whereas if we took the funds out of savings, we’d be a bit less quick about replacing the money. It’s a good tool for us.
One cautionary tale: check to see who is liable for paying the loan. Is it joint or are you each responsible? Do both people need to sign the loan check? Is it just you if your name is on the house? A dear friend of ours owned a house jointly with her DH. They had a HELOC. She only found out after he left that he had drained the HELOC buying computers, electronic toys, etc. She had to pay it all back herself as he then declared bankruptcy and the terms of the loan was that they were jointly and severally liable. (This was almost 20 years ago, and bankruptcy rules have changed, but still…) On our loan, we are both on the account, but only one has to sign. That is a leap of faith!
Good question romani.
I am not an expert - we purchased our house in both names - but I think if you file jointly his income is part of ‘household income’. This is one to check with your credit union.
HI Romani – yeah I read that and was confused and I’ve been doing mortgages for 20+ years. His credit will only come into play if he is on the loan (note). If he is just on title, his credit will not come into play.
notrichenough had a lot of good advice as did others. Sometimes they’re offered with a low teaser rate but that rate requires you to draw down the line within 3 months of closing. Feel free to PM me if you like.
Try to be sure you are informed of any and all charges associated with your HELOC—any appraisal, closing, and other fees and costs, including annual fees. These can add up. Also be sure there is no prepayment penalty.
When we opened our HELOC, there were NO costs at all to open, and no minimum draw and no annual fees if you didn’t have an outstanding balance.
I was able to talk to them briefly yesterday and yes, Mr R’s income can be included but his credit won’t be checked. I called back today but they closed early due to the snow (it’s really bad).
I have a list of questions from this thread and the app all filled out ready to submit as long as I’m comfortable with what they say. I called around to a few banks and credit unions and their rates were all significantly higher.
Not quite. If you have PMI on your primary loan, the bank cannot drop it for 5 years, even if you have above 20% equity in your home. You can refinance and the new loan will not have PMI if you have at least 20% equity. Before Dodd-Frank, you could ask your lender to drop PMI if you had above the 20% equity and you could prove that with an appraisal. Now you have to refinance or wait the 5 full years.
If you want your husband’s income included in your calculations, he’ll have to sign the note. He won’t be on the mortgage if he’s not on the title.
You might ask if you have to pay for the recording fee based on the amount of the Heloc. Some states charge by the page, some charge by the amount secured and it can be hundreds of dollars difference. You don’t want to take a loan for thousands more than you need. It’s like having a credit card with a high credit limit. Some lenders will hold that against you when you apply for more credit (a car, a second home, etc)
Anyone on the title must agree to the mortgage (deed of trust) on the property, even if they don’t sign the loan papers. Anyone not on the title shouldn’t be signing the mortgage because it screws up the chain of title.
Most banks/title companies want to keep it all clean and have all the loan documents match the title. Some will require the spouse who owns the property to quit claim it to them jointly in order to have the loan match the mortgage. Some banks are fine with principal borrowers (in this case Mr. R) or co-signers not being on the mortgage.