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My first home was an 80/10/10. 1st mortgage 80%, 10% HELOC, and 10% down. It was fine. The only reason I did it was to avoid PMI. It worked out well b/c I bought a beater car with the HELOC and that was a better interest rate than a used car loan.
My first home was an 80/10/10. 1st mortgage 80%, 10% HELOC, and 10% down. It was fine. The only reason I did it was to avoid PMI. It worked out well b/c I bought a beater car with the HELOC and that was a better interest rate than a used car loan.
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Gateway drugs to bankruptcy? My mortgage balance and my maximum LOC add up to less than a third of the current value of my house. I'm not too worried.
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@larrymac is not selling Monster Energy Drink:
Agreed. \"Gateway drugs to bankruptcy\" is a ridiculous thing to say. I owe my college education to money my parents took out of the equity in their house. Sure, they still owe a lot of money on a house they bought 24 years ago, but they have 3 college educated children (2 with post-graduate degrees with the third in graduate school).
All 3 of us are making quite a bit more money than most people our age. So you could easily argue that my parents' choice to cash in on their home equity was the complete opposite of a \"gateway drug to bankruptcy.\" Because their decision to invest some of their home equity in our educations will probably mean far greater financial security in their old age because they won't have to worry about taking care of us.
Home equity instruments are no more a gateway drug to bankruptcy than marijuana is a gateway drug to, well, drugs.
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@plamoni: Actually, your parents should have saved their money for their own retirement and let you fend for themselves. Putting your money into your children's education in hopes that they'll (a) get better-paying jobs, (b) hold on to them, (c) save the money they earn from them, and (d) use the money to take care of you in your old age is a crapshoot.
@dilbert69:
Agreed. My parents have always used their home equity line to fix up the house, or for emergencies. I've also never stepped foot in a college classroom and also make more than most my age. The difference is my parents aren't having to foot the bill for my education. And shall I one day decide to get some higher education, I'll gladly pay for that myself. Why should my parents be stuck paying for it for the rest of their lives?
@larrymac is not selling Monster Energy Drink: i may or may not have smoked 1/3 of my bodyweight worth of weed in college. I'm not worried either.
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Yay for the HELOC i picked up in 2006 for Prime minus 1%. Talk about timing. That's 100 a month on a $48k balance, and I'm in no rush to pay it off. Actually using it as capital in other investments which are up significantly this year. OPM is my favorite thing!
@zacox:
So let me get this straight... You're borrowing money at a variable rate to invest elsewhere in the middle of an economic crisis? That sounds like a pretty risky thing to do.
Plus, it's a good thing you're not in a rush to pay it off. With an interest rate of prime + 1% and a $48,000 balance, if you make payments of $100 a month, even at a prime rate of 0%, it will take over 50 years to pay off your debt. With the current prime rate of 3.25%, you'll never pay off you debt. Ever.
I hope you have a lot of life insurance.
@plamoni:
He said prime minus 1, so right now he's basically just paying interest (1200/year in payments, 1080/year in interest). Frankly, given that you can get about 2% risk-free, that's about as cheap as capital can possibly get.
\"It's definitely best to avoid either unless absolutely necessary, because both can be gateway drugs to bankruptcy.\"
Hogwash!
What leads to bankruptcy is running up the balance on your HELOC to more than you can afford. Used responsibly, a HELOC is no more dangerous than any other type of loan (mortgage, HEL) whose collateral is your house.
We refinanced our mortgage years ago into a HEL and HELOC from the same bank. The bank subsequently refinanced the HEL for free at a lower rate, and doubled the size of the HELOC. When the prime rate plummeted in the downturn, we paid off the remaining balance on the HEL using the HELOC, since the interest rate on the HELOC was more than 3% lower than the rate on the HEL.
The fact that we have a HELOC allows us, for example, to:
* Use the HELOC as our emergency fund so that we don't have to keep lots of cash on hand making lousy interest.
* Participate in my employer's ESPP, making at least a 15% return on my money every six months, at which point I sell enough of the stock to get back the initial stake and put it back into the HELOC to pay down the balance.
* Put as much money into my 401k as my employer matches, even though that means going cash-flow negative and increasing the HELOC balance, because even at the higher balance; we are essentially transferring equity from our house into our 401k, and making a substantial return on it because of the employer matching which we'd be fools to pass on.
* Get a tax deduction for the interest we pay on the HELOC.
The maximum balance on our HELOC is well below the value of our house and well below what we can afford to pay off, so even if we max it out and have to stop doing the ESPP / 401k contributions temporarily, we'll still be able to pay it off without worrying about bankruptcy.
@jik: Ditto.
If you are financially secure, a HELOC is *significantly* better than most anything else on the market.
My Visa is at 13%. My HELOC is at 9%.
BUT. . . my HELOC interest is tax deductible.
My Visa gives me enough points to buy a blender a year, maybe.
Lastly, the HELOC by design is equal to or less than the equity in your house. Thus, if I had to sell my house, as long as I can make back the purchase price for it, the HELOC isn't a problem.
Again, that's an issue for the folks underwater, but I'm not in that boat, because I didn't buy more house than I could afford with a loan that would go insane in a few years.
HELOC, like all financial tools, is a great deal for those able to manage their use.
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A HELOC is a credit card on your house equity. Only real difference is that the interest is a tax deduction. What is crazy is using the HELOC to payoff unsecured debt. What you are doing is turning unsecured (credit cards) debt into secured (real estate) debt. Thereby putting your home on the line if you default.
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Most importantly, know exactly how much you need and when you'll need it, and crunch the numbers. Do your research. Make sure you know exactly what you want (i.e. HEL vs. HELOC) before contacting a bank and applying for a loan. Don't count on the bank rep to help you make the decision. They will pick the solution that works best in their favor, not yours.
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With the HELOC the bank is only charging you interest so at the end of the \"draw period\" there is a balloon payment due for the total amount you have borrowed. You need to plan way ahead and make extra payments to pay down the principal.
With a second mortgage (Home Equity Loan) you borrow a fixed amount and are paying both interest and principal so at the end of the loan period you are paid off in full.
Another difference is if you make extra principal payments to the HELOC (adjustable rate) it reduces your monthly interest payment due but the end date does not change (unless you pay off in full).
If you make extra principal payments to a Home Equity Loan (fixed rate), the monthly amount due remains the same but the length of the loan shortens.
@nocar: \"... at the end... there is a balloon payment due for the total amount you have borrowed.\" That depends very much on how your HELOC is structured. The one I've got closes after 15 years (although the bank has the option to close it sooner) and converts at that point into a fixed-rate HEL with a 15-year payoff period.
I would find it hard to believe that there are HELOCs structured as you've described. It would be absurd for a bank to allow a homeowner to run up a huge balance on a HELOC and then demand that the entire balance be paid off in one fell swoop. However, if there are indeed HELOCs structured that way, then of course you're right that the homeowner had better make damned sure he/she/they are in a position to pay off the loan when it comes due.
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I have a HELOC with PNC. It is variable rate but I could also opt to convert it into a fixed rate loan once I draw out the money and specify how many year I want to pay it (for up to 20 years). The convertion cost is $100.
Technically, those are two of the differences. A much more significant difference is that HELs can be gotten for a fixed interest rate and term while a HELOC are always variable rate.
@Gannoc: Indeed. Significant enough, in fact, that it was the first of the two differences mentioned.