What's the difference between a mortgage and a HELOC?

[Muse]

When I bought my major fixer-upper in 2000 I applied for a mortgage and the branch manager/loan officer told me that the fact that I don't have central heating in my Berkeley, CA house wouldn't be a show-stopper. As it turned out, it was. He told me his higher-ups turned it down and I forfeited my $250 loan application fee (that he'd promised me I'd get back in the unlikely event I was turned down) and had to scramble to get enough cash to buy the house outright. The only reasons I didn't sue the bank for my $250 was:

1. I'd never sued anybody in my life and didn't want to get started even thinking like that. It would be small claims court, of course.

2. I actually liked this guy, the branch manager at the bank (Washington Mutual), even though I felt I got kind of screwed.

Well, now things have gotten to the point where I just have to move forward with major needed repairs on the house and I'm contemplating my options. I am unemployed, but have around $130,000 in a mutual fund (through the same bank), and figuring they'd still turn me down for a mortgage, I applied for a HELOC with them and they told me (the same guy!) I'm approved and just have to come in and sign the papers. I'd have to pay a one time fee of $423, and having excellent credit would get .50% under prime as my APR on up to $250,000, variable rate (and, of course, that rate will probably be going up). I'm told I can convert to a fixed rate amortized loan at any time, depending on the current rates they carry. I have until next Friday (9/16) to accept this loan (one month from the day I applied).

My mutual fund is rated 5 stars by Morningstar and although not a lock, has averaged 9-10% yearly return (dividends plus the few percent that the fund value/share accrues each year) over the last 10 years or so - that's better than the 6% I'd be paying on the HELOC, so I'm tempted to use the HELOC and keep my cash in the fund. Besides, I had to pay 3.5% just to get into the fund last November. A guy reminded me a couple of days ago that I'd get better terms with a first mortgage, something I've known for a while. But I figure I won't get approved. Would another institution maybe approve me?

What is the real difference between a first mortgage and a Home Equity Line of Credit? Why does the first mortgage have considerably better rates for amortized fixed rate? Don't both of them use your house as collateral? When they appraised my house for the mortgage they sent an appraiser who inspected the house inside and out. For the HELOC, the appraiser did a "drive by" and phone interview. Why the difference?

The bank tells me I can apply again if I don't pick up on the HELOC that's on the table for another 8 days, but I wonder if I should let it pass. I figure I'm not going to actually need the funds until the spring because I think the upcoming winter rains will interfere with the repairs considerably. I figure just the basic repairs I need to do to get the house safe and weather protected will cost over $100,000, maybe much more. Thanks for any information or advice.

It's usually referred to as a HELOC, not HELC.

Thanks, I'm correcting it.

 

[TheAdvocate]

It's usually referred to as a HELOC, not HELC.

He has set you up to wring as many origination and renewal fees as possible out of you. I'll let a mortgage banker discuss your options, but I'd tread carefully here. Each conversion or renewal is gonna cost you some money, and it really shouldn't. HELOCs aren't intended for 100% average usage, so the fees are superfulous and unnecessary if the line is gonna be ~100% funded for years to come.

I'm confused where the equity for your HELOC is coming from? Your fund is irrelevent. Is it appraised equity?

Anyway, call a few other mortgage bankers. Get a 2nd opinion. Your biggest problem is having no source of cash flow (unemployed).

 

[ITJunkie]

Well, in answer to your question...the difference between the two is that HELOC's allow you to borrow against the equity in your house, like a credit card, and usually has a time limit for borrowing of 10 yrs or so. Most, if not all, are also variable rates which, as you already know can fluctuate.
If the prime rate goes crazy, you can convert your HELOC over to a conventional loan (setup like your first mortgage with a fixed rate) but at that point you can no longer borrow against your home equity.

I think that's how it goes, anyway

 

[thomsbrain]

if you've got money floating around, why not add central heating, then get a mortgage? depending on the house, it might be impossible, of course. but it sounds like if you can get a better deal, it might almost pay for itself, and you'd get to enjoy central heating, and it would raise the value of the house a little.

 

[Muse]

Originally posted by: TheAdvocate
It's usually referred to as a HELOC, not HELC.

He has set you up to wring as many origination and renewal fees as possible out of you. I'll let a mortgage banker discuss your options, but I'd tread carefully here. Each conversion or renewal is gonna cost you some money, and it really shouldn't. HELOCs aren't intended for 100% average usage, so the fees are superfulous and unnecessary if the line is gonna be ~100% funded for years to come.

I'm confused where the equity for your HELOC is coming from? Your fund is irrelevent. Is it appraised equity?

Anyway, call a few other mortgage bankers. Get a 2nd opinion. Your biggest problem is having no source of cash flow (unemployed).

I think the equity is coming from the appraisal of the house. The banker said to be approved, the house had to be appraised at > $600,000 and the banker said the appraiser's figure was $605,000.

I'm looking for a job/jobs, but the going's been tough in my line of work as a database programmer. In the S.F. Bay Area, it just seems that it's hard to find a job in FoxPro - the jobs I'm seeing advertised are for management people or people with lots of experience in multiple languages. That's what the postings indicate, anyway.

I don't understand this line: "HELOCs aren't intended for 100% average usage, so the fees are superfulous and unnecessary if the line is gonna be ~100% funded for years to come. " What does that mean?

BTW, this HELOC has that $423 one-time fee, but no annual fees and it's good for 30 years. Washington Mutual changed their HELOC policies last fall, eliminating yearly fees.

 

[Muse]

Originally posted by: thomsbrain
if you've got money floating around, why not add central heating, then get a mortgage? depending on the house, it might be impossible, of course. but it sounds like if you can get a better deal, it might almost pay for itself, and you'd get to enjoy central heating, and it would raise the value of the house a little.

Yeah, at least it might enable me to get a first mortgage. I'd like to install a smart and sensible central heating system with ducting in the walls to the various rooms, upstairs and downstairs (it's a 2 story, 1920 square footer), but I don't know that it's smart to install that at this point. I can investigate that. But maybe I can install something in the interim making it possible to get that mortgage, assuming the other lenders find that a stumbling block (which I'm not sure of). It doesn't get that cold around here. I'm not going to freeze to death. I've lived here over 20 years, just the last 5.5 as the owner.

Cental heating make more sense here when I get the house properly insulated. I want to put in double pane windows and insulate the walls and attic, which will make it a lot less expensive to use central heating. Right now my utility bills are pretty low.

 

[TheTony]

Simply put, a mortgage is a loan. A HELOC is a line.

 

[Muse]

Originally posted by: TheTony
Simply put, a mortgage is a loan. A HELOC is a line.

Simplicity is a great thing. Problem is, that's too simple for me. What's the difference? Does it work like the following?

I guess the loan means I get a lump sum of money and then pay it off in regular payments. If a fixed rate loan, then amortized over a set time period, say 10, 15 or 30 years, and after the amortized payments are done with, the loan's paid off and that's that.

A line is sort of different: I have a maximum amount and I can borrow up to that maximum at any time, pay off the principal or any portion thereof at any time, and only have to pay the due interest at any time. If it's variable rate, I pay the current interest rate. If it's fixed rate, though, I've what? Essentially frozen the line and can't borrow any more? A previous post said that if I go with the fixed HELOC rate, I can no longer access my equity. I believe that if I go with the fixed rate HELOC option, my payments are amortized and I'm paying off the principal as well as interest rate over the term chosen.

 

[edprush]

Are you saying that a mortgage can obtained for a home that you already own?

 

[Muse]

Originally posted by: edprush
Are you saying that a mortgage can obtained for a home that you already own?

Yes, I believe that's the absolute truth. I heard it a long time ago (when my initial mortgage fell through).

 

[chowderhead]

Originally posted by: Muse
When I bought my major fixer-upper in 2000 I applied for a mortgage and the branch manager/loan officer told me that the fact that I don't have central heating in my Berkeley, CA house wouldn't be a show-stopper.

why are you taking real estate/ home improvement advice from a loan officer who has a vested interest in you borrowing money from them?
Do you really need a central heating system in Berkeley California? You are going to sink $100k in a house worth about 600k (allegedly because the appraiser seems to be in cahoots with the banker to hit a appraisal value to qualify for loan) ? Will the house appreciate the full value of the improvement or should you consider just selling it now as is? Personally, I would stop doing business with this loan officer. He sounds shady.

 

[Muse]

Originally posted by: chowderhead

Originally posted by: Muse
When I bought my major fixer-upper in 2000 I applied for a mortgage and the branch manager/loan officer told me that the fact that I don't have central heating in my Berkeley, CA house wouldn't be a show-stopper.

why are you taking real estate/ home improvement advice from a loan officer who has a vested interest in you borrowing money from them?
Do you really need a central heating system in Berkeley California? You are going to sink $100k in a house worth about 600k (allegedly because the appraiser seems to be in cahoots with the banker to hit a appraisal value to qualify for loan) ? Will the house appreciate the full value of the improvement or should you consider just selling it now as is? Personally, I would stop doing business with this loan officer. He sounds shady.

You may be right. Your take on the situation with the appraisal rings pretty true, too. I thought their appraisal of the property back in 2000 was pretty generous, too. They have no good reason to appraise it low, if you think about it. They tell you your house is worth a lot of money and figure it will only coax you into borrowing from them and improving it. Meantime, they get interest from you. Well, I don't know where else to get "real estate/ home improvement advice" (well, the financing of it) than from a loan officer, frankly, unless it's friends (whose experience is sketchy and anecdotal, for the most part), which is why I posted here. I figured that some people in this forum are up on this stuff. When you have a house (some Anandtechers do), you are apt to have more than a passing interest in these topics. I'm a novice, absolutely. In fact, I've never been in debt in my life - and I've been around a while! I'd really like to have my feet on the ground here, both in the improvements financing and the nature of the work I'm going to do and have done on the house. I'm pretty handy with tools, although I've never worked in the construction trades - I'm a DIY guy from way back, but some of the stuff that needs to be done here intimidates me. Even so, I'm contemplating taking on some pretty heady stuff.

So, can I get any advice of where I can best get advice here? Should I run down to Barnes and Nobel and Buy "Home Repair Financing for Dummies" or whatever it might be called?

Answer to this question: "Do you really need a central heating system in Berkeley California?" Yes and no. Before I insulate the house and install the double pane windows I mentioned, maybe not, especially until my finances really improve. Like I say, I've been here over 20 years without central heating and never worried about it. The only big downside to it has been in 2000 when they refused my mortgage application, ostensibly because of the lack of central heating. Of course, they may have only been using that as their excuse/reason. I have to suspect that because the loan officer initially assured me that wouldn't be a problem. There are some other issues. There is peeling paint. Granted, they can't put this house on the real estate market without renovations. Even so, it's a big and basically well-built house. Once I get the foundation replaced it'll be pretty safe, too. This is earthquake country, after all.

I don't know, really, if the house will appreciate by at least the amount of money I put into it. However, I don't have a mind to just sell it as is and move. I may well fix it up and then sell it and move somewhere more suited to me. It's not the perfect house for me, but it's not too bad in reality. Needs a ton of work, though.

So, the question again: Who do I ask for advice on this if not right here in ATOT? I made an appointment with a loan person at World Savings for Monday morning. She told me about their HELOC's, and it sounds to me like the Washington Mutual HELOC is about the same thing - more money up front, but no yearly fees, same interest rate. I asked her about the possibility of getting a mortgage through them and she said they had multiple scenarios and she clearly didn't want to discuss them on the phone - so I made that appointment. Maybe she will be upfront, knowledgable and generous with her advice. Well, I can hope. She sounded busy on the phone, though.

 

[shud]

One puts you in debt and the other is a Humvee with a weapon mounted on the roof, right?

 

[chowderhead]

Originally posted by: Muse


You may be right. Your take on the situation with the appraisal rings pretty true, too. I thought their appraisal of the property back in 2000 was pretty generous, too. They have no good reason to appraise it low, if you think about it. They tell you your house is worth a lot of money and figure it will only coax you into borrowing from them and improving it. Meantime, they get interest from you. Well, I don't know where else to get "real estate/ home improvement advice" (well, the financing of it) than from a loan officer, frankly, unless it's friends (whose experience is sketchy and anecdotal, for the most part), which is why I posted here. I figured that some people in this forum are up on this stuff. When you have a house (some Anandtechers do), you are apt to have more than a passing interest in these topics. I'm a novice, absolutely. In fact, I've never been in debt in my life - and I've been around a while! I'd really like to have my feet on the ground here, both in the improvements financing and the nature of the work I'm going to do and have done on the house. I'm pretty handy with tools, although I've never worked in the construction trades - I'm a DIY guy from way back, but some of the stuff that needs to be done here intimidates me. Even so, I'm contemplating taking on some pretty heady stuff.

So, can I get any advice of where I can best get advice here? Should I run down to Barnes and Nobel and Buy "Home Repair Financing for Dummies" or whatever it might be called?

Answer to this question: "Do you really need a central heating system in Berkeley California?" Yes and no. Before I insulate the house and install the double pane windows I mentioned, maybe not, especially until my finances really improve. Like I say, I've been here over 20 years without central heating and never worried about it. The only big downside to it has been in 2000 when they refused my mortgage application, ostensibly because of the lack of central heating. Of course, they may have only been using that as their excuse/reason. I have to suspect that because the loan officer initially assured me that wouldn't be a problem. There are some other issues. There is peeling paint. Granted, they can't put this house on the real estate market without renovations. Even so, it's a big and basically well-built house. Once I get the foundation replaced it'll be pretty safe, too. This is earthquake country, after all.

I don't know, really, if the house will appreciate by at least the amount of money I put into it. However, I don't have a mind to just sell it as is and move. I may well fix it up and then sell it and move somewhere more suited to me. It's not the perfect house for me, but it's not too bad in reality. Needs a ton of work, though.

So, the question again: Who do I ask for advice on this if not right here in ATOT? I made an appointment with a loan person at World Savings for Monday morning. She told me about their HELOC's, and it sounds to me like the Washington Mutual HELOC is about the same thing - more money up front, but no yearly fees, same interest rate. I asked her about the possibility of getting a mortgage through them and she said they had multiple scenarios and she clearly didn't want to discuss them on the phone - so I made that appointment. Maybe she will be upfront, knowledgable and generous with her advice. Well, I can hope. She sounded busy on the phone, though.

I think there is a major difference in cost between peeling paint to central heating to foundation work! They rejected your mortgage application not because you don't have central heating, they probably didn't like your credit scores or your income streams were not high enough. The fact that you are currently unemployed makes you a riskier candidate for a mortgage.

The question you have to ask yourself, what is your goal with this house? How long do you plan on staying? You say you want to sell probably in the future. Can you get a job in the area or will you have to move? Why do you need to do home improvement now at a time when you are pressed for money because you don't have a job? Do you need the money to live on or are you borrowing solely to do home improvement?

Berkeley is a insane market and if your house is big, you can probably get a lot of money for the house even if it is a fixer upper. Plus, I would so much rather own the house outright with all its faults then go into debt and sink a lot of money into a house that you will sell in the future. Here is a rough appraisal calculator appraisal calculator to see how much your house may be worth. Another good source is the FW finance forum.

advice on home improvement
FAQ on HELOCs

Good luck.

 

[Muse]

Originally posted by: chowderhead

I think there is a major difference in cost between peeling paint to central heating to foundation work! They rejected your mortgage application not because you don't have central heating, they probably didn't like your credit scores or your income streams were not high enough. The fact that you are currently unemployed makes you a riskier candidate for a mortgage.

The question you have to ask yourself, what is your goal with this house? How long do you plan on staying? You say you want to sell probably in the future. Can you get a job in the area or will you have to move? Why do you need to do home improvement now at a time when you are pressed for money because you don't have a job? Do you need the money to live on or are you borrowing solely to do home improvement?

Berkeley is a insane market and if your house is big, you can probably get a lot of money for the house even if it is a fixer upper. Plus, I would so much rather own the house outright with all its faults then go into debt and sink a lot of money into a house that you will sell in the future. Here is a rough appraisal calculator appraisal calculator to see how much your house may be worth. Another good source is the FW finance forum.

advice on home improvement
FAQ on HELOCs

Good luck.

Thanks!! I have to split now, won't have a chance to check out the links until tomorrow. Your feeling about preferring to own the house outright rather than borrow money to fix it up are exactly how I have felt since buying the house over 5 years ago. I'd probably coast along still except that the roof really needs to be re-roofed, badly. And people tell me it's wiser to do the foundation before the roof if possible, and the foundation, while not crumbling, is a dangerous affair where I am < 2 miles from the Hayward Fault. I'm taking a chance if I don't get the foundation fixed. If there were a 6.9 quake today, the house could be virtually a total loss, I suppose. I could just dip into my mutual fund and finance virtually if not actually all the major repairs I need - foundation, removal and replacement of the current siding, new roof, exterior paint and new windows, rebuild the porch and front steps and walkway. That would just about exhaust my fund. I have a little more in my Roth IRA, that I can dip into pretty soon. Best if I get a job, really. Yeah, the Berkeley housing market is red hot. I'm going to really think over what you said. Hey, I've never been in debt. I like the feeling. Particularly now when I don't have a job, why get in debt? I can put off all the interior stuff until later, including the heating.

I did have a pretty good job when I bought the house. I was making over $50,000/year at a full time job. It ended 2 days after 9/11. My credit scores must have been really good back in 2000, really as good as now. I've got great credit, although I've never been in debt. They had no reason to suspect I wouldn't make mortgage payments in a timely and consistent manner, although I didn't have the cash I do now. I had a fair amount of cash, but I had to use it all the buy the house once they turned me down for the mortgage. I don't know why they did that. Maybe I was told the truth and it was the central heating. Seems kind of bogus, but maybe not.

The only reason I'd get the HELOC (or mortgage) instead of using my mutual fund (liquid!) assets is that I figure that money will make more return than the interest on loan money, frankly. Does that make sense? 10% > 6%, assuming I do get 10% or something near it. Does that make sense?

 

[TheAdvocate]

Originally posted by: Muse
I don't understand this line: "HELOCs aren't intended for 100% average usage, so the fees are superfulous and unnecessary if the line is gonna be ~100% funded for years to come. " What does that mean?

BTW, this HELOC has that $423 one-time fee, but no annual fees and it's good for 30 years. Washington Mutual changed their HELOC policies last fall, eliminating yearly fees.

My statement meant that banks charge fees to ensure profit margins. If they cannot make enough money off the rate, they can make it by charging you fees. Generally, they prefer fees because it's up-front money, and therefore doesn't go away if you payoff or refinance the loan (prepayment penalties notwithstanding).

If WAMU is putting down that there will be no more origination, renewal or conversion fees for the facility for 30 years, in writing, then that invalidates my argument. I'd read the fine print closely though. This is like buying a car - they'll squeeze the price only to screw you on your trade and the financing. Same basic concept.

You definitely are taking a risk right now if you do any adjustable rate financing. Unless you can and will pay it off quickly, I'd go fixed rate. But ask an actual mortgage banker... better yet, ask several.

 

[Muse]

Originally posted by: TheAdvocate

Originally posted by: Muse
I don't understand this line: "HELOCs aren't intended for 100% average usage, so the fees are superfulous and unnecessary if the line is gonna be ~100% funded for years to come. " What does that mean?

BTW, this HELOC has that $423 one-time fee, but no annual fees and it's good for 30 years. Washington Mutual changed their HELOC policies last fall, eliminating yearly fees.

My statement meant that banks charge fees to ensure profit margins. If they cannot make enough money off the rate, they can make it by charging you fees. Generally, they prefer fees because it's up-front money, and therefore doesn't go away if you payoff or refinance the loan (prepayment penalties notwithstanding).

If WAMU is putting down that there will be no more origination, renewal or conversion fees for the facility for 30 years, in writing, then that invalidates my argument. I'd read the fine print closely though. This is like buying a car - they'll squeeze the price only to screw you on your trade and the financing. Same basic concept.

You definitely are taking a risk right now if you do any adjustable rate financing. Unless you can and will pay it off quickly, I'd go fixed rate. But ask an actual mortgage banker... better yet, ask several.

I may just pass it up. I talked to the loan officer/branch manager this morning on the phone. He said they probably aren't going to enforce the one-month-to-decide policy. When his bank tells him to prod me to make a decision, he will call me with the news. Until he does, AFAIK the offer's still on the table.

He says there's a cancellation fee of $500 if I either sell the house or terminate the HELOC within 3 years of the start date. He didn't tell me that before. There's no 10 year draw or anything like that. I can borrow on the HELOC for up to 30 years. If there's a balance then I have to either pay it off or convert to another form of loan. Whether there's some more fees hidden in there I wouldn't know, but he seems to be maintaining that there aren't. He says I have to pay a minimum of the interest due each month, no more, and I can pay off the balance at any time without penalty. I just have to honor that cancellation penalty to avoid the $500 payment. If I convert to a fixed rate, it's amortized and I get a small rate reduction for setting up autopayment from my checking account with the bank (I already have such an account). Of course, the fixed rate I can convert to depends on what's going on in the economy when I option for the fixed rate. I can option to convert from fixed rate to adjustable rate at any time and according to him there's no fees associated with converting either way - well, that's my understanding. What the rates will be at any point in time is something nobody can guess, obviously.

Here's what the banker told me about the fixed rate option over the phone a week or so ago:

If you fix more than $20,000, you get an appreciable rate advantage over fixing less than $20,000, so it seems that you'd only want to do this with more than $20,000 balance. For over $20,000 the current 20 year amortized rate is 7.24%. If you have autopayment from a WM account in effect, you gain .25% reduction. If non-WM account, .125% reduction for autopayment. A 15 year term gains you .05% reduction, a 10 year term gains you .15%, 7 year .40%, 5 year .50%. So, you'd get 6.84%, for example, on a >$20,000 10 year loan with WM account autopayment in effect. And, of course, you'd have your rate fixed, which might be advantageous in a situation where interest rates were going up. He said that if the prime rate goes down you always have the option of changing back to the adjustable rate situation, no fees, no penalties - I believe he said that.

No, if you borrow less than $20,000, the rates are considerably higher, around 1.5% in fact -- 8.74% before any of the above noted discounts. I don't think I will want to be in that situation ( fixing an amount less than $20,000) for this reason.

I'm not sure it's worth it to open this HELOC, but that's counterbalanced by the opening charge of $423 and the possible prospect of paying a $500 cancellation penalty if I decide to sell the house within 3 years. If I had money coming in, it would look different. Yes, I can probably get more from my mutual fund in returns than the interest due on the HELOC, but there's no guarantee. Yes, I might make a killing in the stock market with the cash I have by virtue of the HELOC, but there's no guarantee. At the moment, I'm strongly considering just doing the minimum to get by - just my roof or even selling the house ASAP. I had a very experienced contractor over the other day and at first he thought I should do just that and I'd make out better than fixing it up and selling. When I told him how cheap I got my hard-to-sell fixer-upper with a tax lien, he totally changed his mind and he told me to do the basic repairs and stay here. I don't know his reasoning.

 

[Muse]

So, my banker calls and leaves a message yesterday saying they want me to make a decision soon on my approved HELOC.

It so happens that I now, for the time being anyway, have some cash flow, or will when I start getting paid for my new job. The job is a 6 month contract, possibly extending to a year or even a few years. It pays half decent but they can can me at any time for no specific reason, so there's not much security. But it's cash flow. Funny thing is, it's about on a par with my last full time job that terminated 9/13/2001, but the cost of housing construction materials has gone up so precipitously that I'd need a job that pays more than twice as much to be on a par at the present time. And the fact is simply that fixing my house is almost all of what I need money for now.

I don't know what to tell the banker. I'm going to ask him if they can wait a few weeks because:

1. I won't need the money until about Nov. 1st when they will (hopefully) finish reroofing my house.

2. I was approved for a no interest loan ( :Q ) of $70,000 through my city/state/feds (?) but I don't have it yet (and don't know if I will ever get it, in fact, because I've suddenly got a source of significant income). Life can be crazy sometimes.

3. I'm still not crazy about going into debt for the first time in my life.

4. Interest rates are going to continue to climb.

5. I can maybe get a first mortgage with a different bank and at a fixed rate a lot better than a fixed rate would be with the HELOC, which would be over 7%.


If the banker says make up your mind now, I may just take it because:

1. It costs me $423 to open it and presumably (they tell me) I will only have to pay more money if I borrow against it.

2. The only downside other than the interest and principal payback is a $500 cancellation fee if I sell the house within 3 years. The stipulation is if I cancel within 3 years, but I figure that's equivalent to saying I sell the house in that time. Why else would I need to cancel?

 

[desy]

Think of the Holoc as insurance, don't use it but if things go wrong its there.
Say your health were to go south having the cash to afford better treatment or whatever won't be offered if they know you have an illness.
Cancellation fee of 500 on a house sale of 600,000 sounds like peanuts to me.

Nothing wrong having a good source of Credit I have 40G in CC availability and a 20G Heloc I owe Zero on all three.
IF things were to go to hell I'd have the cash go in debt big and declare bankruptcy if it got too crazy. Prepare for the worse, pray for the best.

 

[Muse]

Originally posted by: desy
Think of the Holoc as insurance, don't use it but if things go wrong its there.
Say your health were to go south having the cash to afford better treatment or whatever won't be offered if they know you have an illness.
Cancellation fee of 500 on a house sale of 600,000 sounds like peanuts to me.

Nothing wrong having a good source of Credit I have 40G in CC availability and a 20G Heloc I owe Zero on all three.
IF things were to go to hell I'd have the cash go in debt big and declare bankruptcy if it got too crazy. Prepare for the worse, pray for the best.

Hmm, I never think that way but maybe it's smart - have a ton of credit just in case. If you get in big trouble, run up debt and declare bankruptcy. My tactic has been to try like hell to accumulate capital and never borrow anything at all. I could do that now, in fact, but I have to pay a roofer close to $20,000 in 3 weeks or so and I'd have to pay out of my mutual fund to do that if I don't sign the HELOC. Doable, but maybe not smart. Never owing anybody anything in this day and age sounds kind of retarded. Even billionaires carry debt, I suppose, they just juggle it. Or should I say, their accountants juggle it?

 

[geecee]

There are slightly different tax implications for a HELOC as opposed to the primary mortgage. Home Equity Loans/HELOCs are actually second liens, as opposed to a primary mortgage, which would be considered the first lien. From the bank's POV, it's a little riskier to do a HE loan/HELOC, as in the case of default, the primary mortgage would be paid back before any second liens were reimbursed. Thus, the higher interest rates on home equity loans/lines of credit, in general. Getting back to the tax implications, I believe only the interest on the first 100K of the HELOC is actually tax deductible (as opposed to the interest on the entire primary mortgage/first lien being tax deductible). Not being an accountant, I don't know if that's still the case if you have no primary mortgage, which I believe is your situation. If you need to borrow money for repairs or whatever and will be paying interest in any case (i.e. to a credit card, on a personal loan, etc) you may as well take out a cashout refinance primary mortgage or a HELOC, and let the federal government subsidize part of it.

The HELOC is useful in that you don't have to pay anything for it (with the advent of no annual fee HELOCs) to have it available once you're approved. It ends up being like a credit card in that sense and you have it there for a rainy day or a major event. You get a checkbook for the account and you don't have to pay anything if you never draw from it, though as previously noted here, they tend to close after 10 years (though you have the full 30 to pay back anything you do take out).

EDIT: grammar and clarity
EDIT2: BTW, I don't think you should feel you NEED to take this out at this time. Chances are, if you've been approved for a HELOC now, you will be approved just as easily in the future, unless housing prices fall drastically or you go back to the same bank and they're feeling vindictive. If you don't need it and don't foresee needing it for a while, don't fork over the $400+ now and re-apply later. It's just extra piece of mind for an emergency. Also, you had mentioned that your fund earns you an average of 9-10% annually. If that's the case, borrowing from the HELOC obviously makes sense because you'll net ~3% on the money. Just realize that if your fund has a down year, it's going to be the flipside of that.

 

[mugs]

$600k fixer-upper.... I love it.

 

[Muse]

Originally posted by: geecee
There are slightly different tax implications for a HELOC as opposed to the primary mortgage. Home Equity Loans/HELOCs are actually second liens, as opposed to a primary mortgage, which would be considered the first lien. From the bank's POV, it's a little riskier to do a HE loan/HELOC, as in the case of default, the primary mortgage would be paid back before any second liens were reimbursed. Thus, the higher interest rates on home equity loans/lines of credit, in general. Getting back to the tax implications, I believe only the interest on the first 100K of the HELOC is actually tax deductible (as opposed to the interest on the entire primary mortgage/first lien being tax deductible). Not being an accountant, I don't know if that's still the case if you have no primary mortgage, which I believe is your situation. If you need to borrow money for repairs or whatever and will be paying interest in any case (i.e. to a credit card, on a personal loan, etc) you may as well take out a cashout refinance primary mortgage or a HELOC, and let the federal government subsidize part of it.

The HELOC is useful in that you don't have to pay anything for it (with the advent of no annual fee HELOCs) to have it available once you're approved. It ends up being like a credit card in that sense and you have it there for a rainy day or a major event. You get a checkbook for the account and you don't have to pay anything if you never draw from it, though as previously noted here, they tend to close after 10 years (though you have the full 30 to pay back anything you do take out).

EDIT: grammar and clarity
EDIT2: BTW, I don't think you should feel you NEED to take this out at this time. Chances are, if you've been approved for a HELOC now, you will be approved just as easily in the future, unless housing prices fall drastically or you go back to the same bank and they're feeling vindictive. If you don't need it and don't foresee needing it for a while, don't fork over the $400+ now and re-apply later. It's just extra piece of mind for an emergency. Also, you had mentioned that your fund earns you an average of 9-10% annually. If that's the case, borrowing from the HELOC obviously makes sense because you'll net ~3% on the money. Just realize that if your fund has a down year, it's going to be the flipside of that.

Thanks for the considered advice and useful information.

I was on the edge of opening the HELOC today or tomorrow, but (did I jinx myself?) my recruiter called me this evening and told me not to go back to work - the client had decided they don't want my services. I may have done something wrong, but it's unknown what. Sigh... There's a little red demon that only I can see. He sits on my left shoulder and he's laughing. I've lived under this curse since my first job. I must have been 14 and I was an usher in a movie theater. I got fired after one day. My boss told me he'd told me to come in a certain day and time and he'd done no such thing. It's the curse. I've never had a lot of luck in the working world, although objectively I'm a very good employee, IMO. It's part of the grand scheme of things, I guess. I wasn't destined by be a 9-5er, to have job security. I suppose I'll have to figure out an alternative way of succeeding financially in this world.

Well, I just watched the PBS Nightly Business Report and this gent who used to be on the FOMC explained that the FED is going to increase interest rates .25% at every meeting for the indefinite future, and he said it with a smile. Myself, I'm not smiling. I figure it means I will probably pass up this HELOC. My rate when I applied would have been 6%, but by the next two meetings (Dec.) it will be 6.75% (it's already 6.25%). I get .50% under prime, 'cause of my excellent credit. But that doesn't help much if the rates keep climbing and the Fed is very hawkish right now. Screw it. I have the $$ in my mutual fund and that's what I guess I'll have to pay my roofer from next November 1st. I may be wrong, but based on what I'm seeing it looks to me like the fund is only returning around 6% this year, so why open the HELOC? It'll cost me $423 to do so. I just don't know how I'm going to fix up my house. I have to do my roof, it's just a necessary thing. I'll have to paint the exterior, but most of the other stuff that's needed isn't critical unless there's a big earthquake. If big enough, the house will fall off the foundation. Replacing the foundation is not only expensive, it will require residing and there's a lot of other expensive stuff that should be done at the same time, like new electrical service and wiring, insulating the walls, adding shear, rebuild my porch, replace windows. I may just do the roof and paint it, make the house look OK (interior cosmetic stuff) and see if I can get that $600,000 and move on.

Originally posted by: mugs
$600k fixer-upper.... I love it.

Well, just because the bank's drive-by appraiser said it was worth $605k doesn't mean I can sell it for that in its present condition. They are buttering me up again. They screwed me one time, I'm a little more wise now. They took my legs out when I bought the house almost 6 years ago. They promised me a first mortgage and broke their word, same bank, same banker.

Yeah, they might be vindictive, but I will just be up front with them and tell them I don't have the cash flow and will have to pass for now. Vengeance is a luxury I still can't afford.