Converting HELOC to Home Equity Loan

[Homerboy]

We took out a HELOC about a year ago to have some work done on our house (roughly $75k). The HELOC loan is at prime + .25 or 8.5% right now. The work is now done and we're thinking of converting the the HELC to a straight, fixed Equity Loan. These are the numbers I got from the bank:

[iFor today I can lock you in for 344 months at 8.25% and the payment would be $559.16. At 240 months the rate is 8.25% and the payment would be $625.06. At 120 months the interest rate is 8.15% and the payment would be $899.18. I am here until 5 today. [/i]

Right now, while we recoup form the added expenses etc extra pennies per month count so a lower monthly payment would be nice (that way we can eat, drink and pay the power bills). There is no penalty of sort for over/extra payments which go directly to the principal.

I just need some advice on if its a good idea (or not) to convert to the loan or just to keep the money in a HELOC as for "quick access to cash" in case of "emergency"


Suggestions?

/me waits for Dullard...

 

[IceBergSLiM]

I would suggest a financial adviser.

 

[TankGuys]

Originally posted by: Homerboy
We took out a HELOC about a year ago to have some work done on our house (roughly $75k). The HELOC loan is at prime + .25 or 8.5% right now. The work is now done and we're thinking of converting the the HELC to a straight, fixed Equity Loan. These are the numbers I got from the bank:

[iFor today I can lock you in for 344 months at 8.25% and the payment would be $559.16. At 240 months the rate is 8.25% and the payment would be $625.06. At 120 months the interest rate is 8.15% and the payment would be $899.18. I am here until 5 today. [/i]

Right now, while we recoup form the added expenses etc extra pennies per month count so a lower monthly payment would be nice (that way we can eat, drink and pay the power bills). There is no penalty of sort for over/extra payments which go directly to the principal.

I just need some advice on if its a good idea (or not) to convert to the loan or just to keep the money in a HELOC as for "quick access to cash" in case of "emergency"


Suggestions?

/me waits for Dullard...

Interest rates are not going anywhere but up - so from a pure dollars and cents perspective, you should absolutely switch to a fixed rate loan. To be honest, I don't understand why anyone got ARMs over the last few years, when rates were at historic lows. (yes, I realize people banked on moving quickly, IMHO most people just used this as a good rationale for a nice teaser rate, and the risk vs. reward on that decision was less than stellar).

As for keeping the HELOC for an emergency fund, ideally, you should have had a nice emergency fund socked away in a nice high yield savings account long before you took out an additional loan to pay for home upgrades.

If you don't have any sort of liquid savings for an emergency, then it's a judgment call on your part. I wouldn't really advise anyone to use a HELOC as an emergency fund, but to each his own.

 

[dullard]

Originally posted by: Homerboy
/me waits for Dullard...

You did lure me in. Numbers + house related issue = Dullard comes by.

I think you are in a no brainer. 8.5% vs 8.25%. Pick the lower one unless there is something hidden that you haven't told us. I would suggest the 8.15% but I don't know if you can afford those monthly payments.

Variable rates probably won't go much higher any time soon, but they probably won't go any lower either. Thus, to me, fixed vs variable isn't too important short term. But long term, fixed may give you piece of mind (you can probably switch later if you need).

For the 8.25% loans, get the longer one. Both charge the same interest rate and there is no pre-payment penalty; thus there is no incentive to get the 240 month loan. Get the 344 month loan. You can always pay that faster and thus it would be the exact same as the 240 month loan. Or if times get tough, you can cut back. You get extra flexibility with the 344 month loan and it might not cost you a penny more if you don't want it to.

Also, have you checked around to see if those are the best rates you can get? The Fed didn't change rates today, so tomorrow banks might be less hesitant than they might have been today.

 

[Homerboy]

Interest rates are not going anywhere but up - so from a pure dollars and cents perspective, you should absolutely switch to a fixed rate loan. To be honest, I don't understand why anyone got ARMs over the last few years, when rates were at historic lows. (yes, I realize people banked on moving quickly, IMHO most people just used this as a good rationale for a nice teaser rate, and the risk vs. reward on that decision was less than stellar).

As for keeping the HELOC for an emergency fund, ideally, you should have had a nice emergency fund socked away in a nice high yield savings account long before you took out an additional loan to pay for home upgrades.

If you don't have any sort of liquid savings for an emergency, then it's a judgment call on your part. I wouldn't really advise anyone to use a HELOC as an emergency fund, but to each his own.

yes I'm aware of the fact that I SHOULD have an "emergency fund" to start with, but that just isn't happening right now. You answered/reassured me in your opening sentence "rates are going no-where but up" and in all honesty if they were to plummet there's always the refinance in 5-10yrs again.

AND I agreed completely with you on the ARM loans from a few years back. We have our primary mortgage locked in at 5.5% which isn't going anywhere anytime soon. While all of our friends that bought around the same time as us are banging their heads as their ARMs are up and they are in deep cr@p.

Thanks for the input.

 

[Homerboy]

Originally posted by: dullard

Originally posted by: Homerboy
/me waits for Dullard...

You did lure me in. Numbers + house related issue = Dullard comes by.

I think you are in a no brainer. 8.5% vs 8.25%. Pick the lower one unless there is something hidden that you haven't told us. I would suggest the 8.15% but I don't know if you can afford those monthly payments.

Variable rates probably won't go much higher any time soon, but they probably won't go any lower either. Thus, to me, fixed vs variable isn't too important short term. But long term, fixed may give you piece of mind (you can probably switch later if you need).

For the 8.25% loans, get the longer one. Both charge the same interest rate and there is no pre-payment penalty; thus there is no incentive to get the 240 month loan. Get the 344 month loan. You can always pay that faster and thus it would be the exact same as the 240 month loan. Or if times get tough, you can cut back. You get extra flexibility with the 344 month loan and it might not cost you a penny more if you don't want it to.

Also, have you checked around to see if those are the best rates you can get? The Fed didn't change rates today, so tomorrow banks might be less hesitant than they might have been today.

You've commented on several of my thread before so I knew to expect you.

yeap you guys are just reassuring me then on the thoughts I already had. I've never been the best money manager admittedly so I just needed a simple reassurance. Sadly the 8.15 I just can't swing right now and obviously the longer term 8.25% is the no-brainer between those 2.

Admittedly I haven't shopped around, but I've done 99% of my banking with this bank, and they have always done me no wrong (that I know of)

 

[dullard]

Originally posted by: TankGuys
To be honest, I don't understand why anyone got ARMs over the last few years, when rates were at historic lows. (yes, I realize people banked on moving quickly, IMHO most people just used this as a good rationale for a nice teaser rate, and the risk vs. reward on that decision was less than stellar).

Not always. I did the math on many possible situations. Do I move in 3, 5, or 7 years? Do I lose my job, do I get promoted, etc. In virtually every situation, the 5-year ARM was the cheapest for me, so I got a 5-year ARM in Nov 2005. The big catch is that I plan to pay off my house in 8 years from the time I got the ARM though. It would have cost me many thousands of dollars more to get a fixed loan (and that is even assuming my ARM payments skyrocket in the last 3 years).

 

[Homerboy]

Not always. I did the math on many possible situations. Do I move in 3, 5, or 7 years? Do I lose my job, do I get promoted, etc. In virtually every situation, the 5-year ARM was the cheapest for me, so I got a 5-year ARM in Nov 2005. The big catch is that I plan to pay off my house in 8 years from the time I got the ARM though. It would have cost me many thousands of dollars more to get a fixed loan (and that is even assuming my ARM payments skyrocket in the last 3 years).

Right but more than anyone I "know" you seem to know WTH you are doing with money. Most people I "KNOW" just saw the SUPER low-rate and jumped on it with no forethought as to what would be down the line 5yrs later.

Edited for nesting

 

[dullard]

Originally posted by: Homerboy
Right but more than anyone I "know" you seem to know WTH you are doing with money. Most people I "KNOW" just saw the SUPER low-rate and jumped on it with no forethought as to what would be down the line 5yrs later.

Edited for nesting

True. I took the hundreds I saved per month with the ARM and dumped it back into my mortgage. Thus, in the initial years my principal is going down about 4x faster than it would if I had a fixed mortgage. And those initial years is when you really rack up the interest payments so any principal change early on saves you far more than it would later on.

Most people will just blow that extra money and it'll all be gone in 5 years without planning.

 

[TankGuys]

Originally posted by: dullard

Originally posted by: TankGuys
To be honest, I don't understand why anyone got ARMs over the last few years, when rates were at historic lows. (yes, I realize people banked on moving quickly, IMHO most people just used this as a good rationale for a nice teaser rate, and the risk vs. reward on that decision was less than stellar).

Not always. I did the math on many possible situations. Do I move in 3, 5, or 7 years? Do I lose my job, do I get promoted, etc. In virtually every situation, the 5-year ARM was the cheapest for me, so I got a 5-year ARM in Nov 2005. The big catch is that I plan to pay off my house in 8 years from the time I got the ARM though. It would have cost me many thousands of dollars more to get a fixed loan (and that is even assuming my ARM payments skyrocket in the last 3 years).

Sure, in some cases it did work out well. The problem, I think, is that 90% of the people getting ARMs didn't get them for the right reason. I'd be willing to wager that in most cases, the people:

1 - Didn't really understand what an ARM was, and only saw the low initial payment, but had no concept of future changes.

2 - Justified the rate by saying they were going to move in a few years, but didn't really have any solid intention to do so.

3 - Really did plan to move soon, but got screwed when the market took a down turn.


For sure, someone who really does move within the "grace" period is better off - but I'd be willing to bet that it didn't work out that way for the vast majority of people, and they are literally paying for that mistake now.

Sadly, I'd say you're one of the few smart people out there who actually plan well and have the foresight/understanding to make good decisions... that's not a trait many Americans have anymore

Oh, how I wish students were forced to take personal finance classes in HS/College ...

 

[Homerboy]

Oh, how I wish students were forced to take personal finance classes in HS/College ...

Oh I agree. I wish I was one of those students too. Finance, sadly is my weakest point in life I think. The only thing I did RIGHT was dump TONS into my 401k when I was making a lot of "extra" money. While no go to me right now, in 30 years I should be set.... now I just have to make it through those 30 years I'm actually switching my funds over right now, gaining some extra cash in the process (they add additional 7% on new investments?!) and having my old "financial adviser" take over the management of it again.

 

[Homerboy]

Actually interestingly enough, they actually keep the HELOC open and don't close it. They simply "lock" that current amount into a Equity Loan. Then as you pay back principal on the Equity Loan, it then becomes available again in the HELOC it seems. Sneaky-ass little way for them to keep that HELOC carrot dangling over your head.

 

[TankGuys]

Originally posted by: Homerboy

Oh, how I wish students were forced to take personal finance classes in HS/College ...

Oh I agree. I wish I was one of those students too. Finance, sadly is my weakest point in life I think. The only thing I did RIGHT was dump TONS into my 401k when I was making a lot of "extra" money...

That was a great decision. Most people would have blown the extra cash on a big screen TV or a new car

It saddens me how little people understand about retirement savings. Gone are the days we could count on pensions and such, and now people live far too much in the moment.

 

[Homerboy]

well crappy thing is I just checked my updated accounts online this morning. The "lock in" took place but now the payment showing due on the 1st is TWICE the amount than it normally should be.... gotta make a call.