I have been reading on HELOC but still have a question. I understand the line of credit depends on the loan-to-value ration, say I can borrow up to 80% of the equity. However, is there any downside if I were to apply for the maximum amount allowed? I don’t have to borrow all of it, right? hence the larger amount will give me the flexibility I need, if I do need to use it.
During the draw period, can I borrow, repay, borrow and repay some more, then borrow ? Do you do it online or go to the bank? ( I have visited Wells Fargo, but the person was clueless, for nearly an hour, all he told me was that I just applied, then someone from Wells Fargo will call me and asked me whether I understood)
Yes, That has been my experience with my small, local bank. Very flexible but they only gave me 50% of the equity. FYI – I had to move my commercial account away from Wells Fargo. I encountered their branches in three states and they were manned my youngsters who knew nothing. Wells Fargo’s internet tools, however were okay. Another FYI – I made the mistake of drawing from my Roth IRA; and this was a mistake because the financial aid office viewed it as income, The HELOC was the way to go in my case.
We are changing our HELOC now through Third Federal, which was the best rate I found. It is how your describe - a 10 year draw, and can borrow/repay with no pre-payment penalty. It can vary bank to bank, so make sure you read the fine print.
Loan fees and escrow costs are based upon the amount of the loan. So, the higher value of the loan, the higher loan fees and escrow costs. However, some banks will offer no fees no cost loans, but the interest rate/margin will increase to reflect no upfront costs.
Thanks. It is the reason I do not want to take money from the IRA.
It have been checking the web pages of different banks. If I understand correctly, if I were to open a line of credit, but if I do not draw anything for the first year, it means that I do not have to pay anything for the first year, right?
@NJWrestlingmom thank you. I googled last night and it does seem that Third Federal offers the best rate. I didn’t look further as I haven’t heard of the bank, but will look at it now.
My HELOC is through Chase, so others banks may vary. Other than initial costs/fees, the only charge is interest on whatever amount you withdraw/owe. We essentially use ours as a big short-term piggy bank, e.g. significant large purchases where we’ll later sell stocks to cover the cost. Our HELOC came with a check book so it’s pretty easy to use. Be aware that the total amount available will be on your credit report, which may be a good or bad thing depending on your point of view.
Again, check the fine print with each bank. Our first HELOC was with Citibank and they required us to take an initial draw of $25,000 when it was opened, whether we needed it or not. We were allowed to pay it back immediately, though, so we deposited it into our checking account and then wrote a check for $25,000 (plus a little bit of interest) to repay it the following month. Citibank allowed us to make interest-only payments.
Our current HELOC is with Third Federal. They didn’t require an initial draw but they do require principal + interest payments on any outstanding balance. Third Federal had a great rate and no closing costs other than doc stamps. They even sent us a $100 Home Depot gift card! We went to a local branch and the folks there were VERY helpful and knowledgeable.
We never applied for 80% of our equity. Both of our HELOCs were for less than that. With both accounts we had a checkbook so could draw whenever we needed to…
Our PNC HELOC used to have a yearly fee.
@patsmom we’re getting the $100 Home Depot card too! Maybe I’ll finally get around to getting that new ceiling fan! LOL
I had the foresight to suggest opening a HELOC during my older daughter’s junior or senior year of high school, despite my abhorrence of debt, because our credit union was offering a very low interest rate. It turned out to be very useful. We were not required to make a draw until we needed money. We did not make a draw until D1 was a senior in college, when we used it to pay back some of her student loans, replacing loans with at least 6% interest with a loan at 2%. We wouldn’t have had her take loans at all if not for the fact that my then husband lost his job during her senior year of high school. So she had mostly interest free loans until she graduated, then we paid them off with the HELOC, then we (and eventually I) paid off with the HELOC out of income.
The bank can set up the heloc any way it wants. Revolving, non-revolving, minimum withdrawals, no minimums, etc. Many have online withdrawals or checks that you can use. If your bank isn’t offering what you want in terms, look elsewhere.
I worked for a company that had non-revolving Helocs. Once you withdrew the money, it was not available to be taken out again even if repaid. We also only allowed 4 withdrawals over the term of the loan. Honestly, we found most everyone took the full value in either the first withdrawal or second, so we got rid of the program and just went back to conventional second mortgages.
I can think of two disadvantages to getting the entire (or 80%) equity. First, it will be viewed as if you have that much in outstanding debt on your credit scores or if you try to get another forms of credit. It’s not a big ding to the credit score, but it’s possible if you apply for a car loan or a new high limit credit card they will view it as if you are maxed out. on credit.
Second, some states charge for recording the mortgage by the amount being mortgaged. It might be the difference of $20-50, or it might be several hundred dollars in filing fees.
A HELOC is a revolving line of credit similar to a credit card. The main difference is that it’s using your house a collateral. “Revolving” means exactly that. You can draw and pay it off at will. Some banks may put limits on how many draws you can do or how much you can draw at one time. I don’t recommend borrowing up to 100%…ever! Even if it’s just a line of credit and the other 20% is not being utilized. When college expenses add up, it’e easy to take a draw here and a draw there. You need an equity cushion just in case of another financial meltdown.
There are other loans you can take out to pay for school. You can borrow against a 401k. Since you never have to sell a 401k in a recession like your house, you don’t have to worry about being upside down on your loan. Just make your payments.
Also check with the financial aid office about parent loans. Those loans are typically flexible and are taken out as needed.