With my new fat mortgage, I’m considering whether to also take out a Home Equity Line of Credit (HELoC). This is not a home equity loan where you take out a lump sum at a fixed rate, but is a line of credit usually at a variable rate. I think of it as a credit card that is secured by my house (!). I don’t plan on actually using it, but I think it might nice to have around as long as the upfront costs to me are minimal. Here’s why:
Safety Net / Emergency Funds
Although having adequate emergency funds in cash is always preferable, it is nice to know that you have a HELOC as a backup in case of prolonged job loss or health problems. It’s always better to line up credit ahead of time while you have good credit rather than when you are already desperate. Using a HELOC can be preferable over paying sky-high credit card interest or falling behind bills (late fees, damaged credit score). Ironically, you might even use it to temporarily keep current on your mortgage to avoid penalties or even foreclosure. Let’s hope not.
Cheap and Flexible
The nice thing about a HELOC with no fees is that if you don’t take any money out, you don’t pay anything. And because the money is secured by your home, this assurance makes your interest rate relatively low. The rate is usually close to the WSJ Prime rate, which is currently 6% APR. On top of that, your interest paid might even be tax-deductible.
The interest is accrued daily, which makes it good for quick loans. So if you do need to take out $10,000 on short notice and you don’t have the cash on hand, using a HELOC might be the most economical way to do it. At 6%, your interest owed on $10,000 is only $1.64 a a day. Of course, for many folks this convenience might just provide too much temptation. All debt can turn into a double-edged sword. Know thyself, is all I can say.
Tool for Credit Card Profit Games
Here’s a trick to go along with making money with 0% balance transfers that is a good example of that flexibility. With certain credit card issuers it can be difficult to turn your balance transfer into cash in your pocket, especially when you have no existing balances. But here’s an example of how to use your HELOC to extract $10,000:
- Request a balance transfer from your 0% APR credit card for $10,000 directly to your HELOC. Since this is loan they won’t mind at all.
- Shortly before the balance transfer is scheduled to arrive, write a check for $10,000 from the HELOC to your interest-bearing bank account. Now you have created a temporary $10,000 debt at 6% and $10,000 bank balance earning ~4% (minus some possible lost days of interest).
- When the balance transfer payment arrives a fews days to a week later, your HELOC debt will be paid off.
- A week’s worth of interest at 6% APR ion $10,000 is only $11.50. And that is partially countered by interest earned in your savings account.
- Voila! For around ten bucks, you now have $10,000 at 0% APR in your bank account to do as you wish. 😉
Finding a HELOC – What To Look Out For
Now, I don’t want a home equity line if it’s going to cost me a bundle. Here’s a quick rundown of important factors when looking for a HELOC, based on an article by the Mortgage Professor.
- Introductory rate and period. Temporary teaser rate to suck you in.
- Margin. This is usually how your non-teaser interest rate is determined, relative to the Prime rate.
- Minimum draw. How long can you take money out?
- Required average balance. Do you have to take some money out?
- Upfront lender fees. These days, you should be able to eliminate these.
- Upfront third party fees. Harder to get waived, but try.
- Annual fee. Just say no, again. Sometimes only waived for first year.
- Cancellation fee. Many have these, I guess so you don’t bail and go to another bank. This is especially the case if they waive all the upfront costs above, since they are losing money on you so far. As long as you can keep your balance at $0 with no fees, just keep it open and don’t use it.
I see a lot of competition out there now that rates are low, so definitely shop around. As a data point, I just saw a special offer from Bank of America for a no closing cost, no application fee, no annual fee HELOC. Don’t forget to try your local credit unions as well.
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I put one of these in place a year ago, and have not used it. However, I don’t believe that we have yet seen the depths of the financial crisis in the US. I’ve read reports of helocs getting pulled from people because of the depreciating value of their homes. Therefore, I would not advise this as the only safety net that a person carries. Additionally, this is just my opinion, but this is not the time for people to get silly with using credit card leverage (or any leverage for that matter), unless it is for the very short term. Nice research on these, though.
Steve, wish I would have known you back then. Wow, you have incredible vision and a wonderful way of explaining to the point. It’s like you saw it coming, and knew this one is going to last. Real good! Are we there again today? 7/26/19.
We opened up two HELOCs, one that was essentially a second mortgage and one that was really for emergencies (and we have never drawn down on that one). The tip on making sure they don’t sneak a fee for keeping a line open is a great one. We are currently redoing the lines and have also found that the interest rates are quite good now. But we also noticed that the bank was being much tighter about everything — sure seems like the credit markets will make things tougher.
This is terrible, this idea.
The only thing riskier than playing with credit card company’s money is using the bank’s money with your house attached. Just pay the vig, or don’t borrow at all.
If you’re looking into HELOC’s I’ve been researching some and Schwab looks like a great deal.
rate of Prime – 1.01%. 4.99% right now
– no application fees
– no annual fee
– no lender fee
– no minimum balance
– no prepayment penalties
From my experience, HELOCs usually require that take out a minimum amount (for how long I’m not sure) or there are closing costs. You pay something for these, so I just took a personal line of credit with my bank. It’s higher than a heloc (way higher, like 13%) — but I never use it so it doesn’t cost me anything. But if I had to float a mortgage payment for a couple of weeks, it would only amount to about $10, so for that it’s great. And there was no work involved — I just called my bank and said I needed it and now I have a nice 10K line that sits there for any emergencies.
I think you’re on the right track Jonathon. It’s always good to have something set up “just in case”, and it’s not like you’re ever forced to use it. My HELOC rate has been going down, down, down since the fed. keeps lowering the rate, and is actually 2% LOWER than my fixed mortgage! haha…
The only thing i’d keep in the back of your mind, is that lines of credit can be “frozen” during times of housing market declines. It all depends on your loan to value ratio, and the area you’re living in of course, but just thought i’d throw it out there.
As long as people don’t use them as a DEFINITE source of income or back up plan, it’s a helluva good tool 🙂
If your HELOC is 2 percentage points lower than your fixed rate, then you need a to refi. That puts you at what? At least %7?
A HELOC is not for all homeowners. Especially homeowners who are wreckless with credit lines.
If you’re planning on using a HELOC as an emergency fund, beware. If you use a credit card, the debt is not collateralized, so if something catestrophic happens and you cannot make payments on the line, the unsecured credit card debt is written off by the credit card company and your credit score takes a hit.
If you go with a HELOC and something happens that you cannot make your payments (think illness, losing your job, etc), the bank can take your house, and your credit score plummets. This is why I typically do not recommend HELOCs or HELs to pay off significant credit card debt.
If you cannot afford to fund a proper emergency savings account, you probably shouldn’t go the HELOC route. Especially if you’re in a market where the value of your home could depreciate.
That being said, HELOCs can be wonderful tools if used wisely.
Often, in order to get an additional – 0.25 %, you may have to setup automatic payments, say, from your checking account, and an additional – 0.25 % for taking out $25,000 right away (from the HELOC to your checking account). The bank will make the withdrawal for you. Of course, you can immediately pay this back, but I had an experience where I couldn’t pay it back for ~5 days because the account was “unavailable” online. This was Bank of America.
What about using a HELOC for a reasonable vehicle loan? Granted you do not buy over your budget. Could the interest be tax deductible?
I used our HELOC to buy a vehicle once. It was at a point in time where the tax deduction on the interest (yes it is tax dedcutible) made it a better deal than anything the dealer could offer. Also, I was well disciplined and paid it off in a little more than three years — which I think is critically important. Don’t risk losing your home to buy a car! However since then, I’ve found dealer financing to be more competitive. We currently have one loan at 0% for five years on a Saturn VUE.
HELOC is extremely valuable. I agree that it’s a great way to have a safety net. You don’t pay anything unless you use it anyway. I would also use it for potential lower interest loan. Like Ryan said above, it can be an auto loan or any other loan on something you would have otherwise paid a higher interest rate on. You can use it to finance a business at lower rates than business loans, etc.
Definitely a very handy tool and banks are really pushing these so it’s getting competitive.
Beware if you are in Florida, I know someone personally that had their Heloc pulled because of the ‘decline in home equity’. Unfortunately it was right when they needed it so it wasn’t much of a safety net for them.
you should not count on anything that requires an application and credit approval for any kind of safety net PERIOD, especially in the current credit market. You are not guaranteed to get a HELOC despite having equity in your house.
We got one when we bought our current house about three years ago. We had a lot of equity in the prior house, so only needed about $75K for the new house. Borrowed that amount from credit cards (at 0% and 0.99%) and family, paid cash for the new house, immediately got a HELOC with a great teaser rate (first 18 months or somehing); used it to pay back credit cards and family. Then divided off and sold some land associated with the new house, and now we’re free and clear. So, for about $300, we avoided the cost of mortgage, which we figured would have come to at least $2500.
We’ve kept it for many of the reasons mentioned above – a great safetly net. Used it twice when we replaced our roof and when we had some unexpected legal fees, but repaid it right away. I can see how this would be really dangerous for someone who couldn’t resist using the credit card (!!!?!!) that came with the line.
Also, got the line for less than half the value of the house, so we don’t feel in danger of having it pulled.
What % of equity is generally needed before a bank will give you a HELOC?
I’ve got a 30 year fixed with only 10% equity right now (1st time homeowner program, so no PMI). Probably not eligible right for HELOC though right?
Hey Dan, yup you guessed it! my 30 year fixed is at 6.875%. my HELOC was orig. at 9%…and then i started getting on the blogs and paying attention. since then refinanced the heloc and got it at prime – .45%. so actually i was way off w/ the 2% now huh… more like 1.4% diff.
either way, my heloc is now lower. i’m waiting for the 30 year rates to go down some more before re-fi’ing because unfort. the costs on that one will be wayyy more than my $45 heloc refi 🙂 i’ll be keeping my eyes on it though!
I think you need to watch out in Texas too, because I don’t think we’re eligible unless the Loan-To-Value ratio is less than 80%. I believe this is a leftover from the foreclosures with the oil bust in the 80’s so that you specifically can’t get into easy trouble with your home. I wouldn’t be surprised to see more controls in other states.
I got an offer from Third Federal to open a HELOC and get a $200 Gift Card to Home Depot! DEAL!
My HELOC statement just showed up today – new interest rate is 5.00% (prime -1%). This is now lower than my mortgage! It’s not necessarily used as an “emergency fund”, though it could be, but I do pay my income and property taxes directly from this account. I treat it much like an escrow account except that I get to benefit from the money rather than the bank.
I found Third Federal as well on Bankrate, but only $100:
link
“Prime -.51% for life; NO Closing Costs; NO Annual Fee. Open a new line and we’ll give you $100. ”
Also see ING Direct:
“All loan applications are subject to credit and property approval and maximum loan limits. State or local governments may charge residents of AL, GA, FL, KS, MD, MN, NY, OK, TN and VA a tax at closing. Otherwise, you pay absolutely nothing to open, close, use or not use your Orange Home Equity.”
Rates appear to be based on creditworthiness and amount.
$200 Home Depot gift card offer for Third Federal
Is there a hard credit pull when applying for a HELOC?
I just got one from Third Federal at the end of January. My offer was prime – 1.01 for life, no closing costs and no annual fee. In the fine print – no costs to close line, no prepayent penalty, no check fees, no minimum balance. In addition, I qualified for a $225 check for applying within a 4 day window. The check just came last week.
I can attest that the Third Federal process was easy and there wasn’t any hidden fees. I have the checkbook (opted out of the credit card) and the line is on my credit report. BTW – the inquiry came on Transunion for those of you that care about that sort of thing.
Wow that $200 home depot card almost made me interested — but 3rd Federal doesn’t do loans in New York, oh well, too bad. ING’s Orange looks good but I’m still wary of putting my house up as collateral on a credit line. Not to mention, no matter how disciplined I think I am, having a 50K credit line open to me might make me do foolish things. Like thinking it’s okay to buy a new car that I really don’t need.
Jonathan,
I am curious of how to transfer balance from credit card to HELOC.
I have tried to transfer balance from credit card to mortgage, but the credit card website did not accept my Chase home mortgage as a payee. So, I am not sure how you can get HELOC as your credit card’s payee. If you have such info, could you please share with us?
Thanks,
Andy
HELOC competitive rates in NY city:
Current, prime = 6% (3/13/08); Probably by 3/18/2008 prime = 5.25% after Bernanke cut rate by 3/4%.
1. HSBC: first 6 month Prime – 2.51%; then, Prime – 0.51%. If you have $100K in HSBC, you get -0.27% further. Application deadline: 3/23/2008.
2. Chase: Prime – 0.51%; if you have $75K in Chase, you get Prime – 1.01%.
3. Sovereign bank: Prime – 0.76% if you apply by 3/14/2008; after 3/14/2008 Prime – 0.51%.
On average, Prime – 0.51% is just an average deal. Prime – 1% is good. Prime – 2% seems the best.
I’ve never posted on a blog before ever, but I had to say thank you!! I was just about to close with a bad loan. You guys, espceially James’ post about Schwab, saved me lot of money at the last minute. I was going to get a quater point higher, more closing costs, an annual fee, and a large prepayment penalty. Probably saved me over $3,000 over the life of the loan. Thanks!!
Andy;
The easiest way to transfer a balance from a credit card to a HELOC is to just write a check on your line to pay off the card balance. You can’t do this with a mortgage or equity loan/second mortgage, as these are fixed term products for a set amount over a certain time period. HELOCs, pretty much by definition, come with access checks and usually a credit card. The ability to make online transfers may not be as prevalent.
This is very interesting, I hadn’t planned on getting a HELOC, but didn’t realize that it’s something that I could let sit until I really needed to use it without incurring cost. Also, the balance transfer idea is very creative, and a good way to get a finite 0% on money if you know you’re going to use it anyway.
I don’t yet have enough equity in my home ( based on the VA appraisal from when I bought it ) to get a HELOC. When I hit that point in a few years, I absolutely plan to follow the advice here and open one up. I know I won’t be tempted to use it, and it would be nice to have an extra safety net in case emergency strikes.
“I am curious of how to transfer balance from credit card to HELOC.
I have tried to transfer balance from credit card to mortgage, but the credit card website did not accept my Chase home mortgage as a payee. So, I am not sure how you can get HELOC as your credit card’s payee. If you have such info, could you please share with us?”
Sorry for the late reply. A few cards simply accept bank information. If they need a credit-card number, you can usually get a debit/credit card attached to your HELOC. If you transfer a balance from your HELoC to your 0% card, it should “pay off” your HELoC balance.
Jonathan,
Thank you! If you don’t mind, could you tell us one or more mortgagers and credit cards that you are able to transfer credit card balance to HELOC (or even to mortgage)?
The reason that I ask is, I may directly apply to their HELOC and credit cards if, after review, I find their terms are good. I haven’t got a HELOC at this time.
Thanks,
Andy
What do you guys think of opening a HELOC to pay off a higher interest rate Home Equity Loan?
Is this a good idea in the current market?
There are a lot of benefits to taking out a HELOC. But, don’t forget to consider the risks too. Unlike a home equity loan, a HELOC can be frozen without notice if your lender decides that your home value has dropped.
Also, some HELOCs require the money to be paid back in a balloon payment at the end of the withdrawal period – some people may find it very difficult to pay back such a large amount in one lump sum.
Finally, I think it’s important to remember in order to refinance the second mortgage holder (i.e. HELOC lender) has to give approval. Recently, some borrowers haven’t been able to refinance their original ARMs because their HELOC lender want them to pay back the credit line first.
Tool for Credit Card Profit Games
Uh….I don’t get it….can’t I just take the 0%APR and transfer it directly into the bank to earn interest? Why bother with a HELOC. Credit card companies don’t care if it’s for a loan or not.
Many credit cards do not let you perform a balance transfer directly to a bank account. They can only pay off another loan or credit card balance. The only way to get cash for some issuers is through a cash advance.
We are considering the heloc for the purchase of a new home. My concern is interest only and floating interest rate. We plan to pay it off with the sale of our current home, but will the house sell quick enough? It seems risky for a family on one income? Any advice would be appreciated.
Some banks sends out 0% APR balance transfer checks which you could use to deposit directly into your personal savings or checking account, then you could simply wire it to any financial institution of your choice like your mortgage lender.
Wow. Debt powered debt instead of cash value with guaranteed risk is always the worst way to live.
If you lose your job or have a prolonged health issue, a HELOC is not going to bring you peace of mind, you will always owe. Always.
A credit card insured by your house, one falls, they both do. Bouncing money around always insures the fall will come eventually.
Cash is a much better emergency fund.
Question :
I love the article and loved the idea of opening a Heloc but it seems in NY, there is a 1.8% recording tax? I’m afraid to open up a 100k line, pay 1800 bucks, not use it and then have my line frozen due to the slumping credit/housing crunch..
Some have told me that lenders will sometimes absorb these fees making the Heloc truly NO FEE. Anyone have any success with this?
Thanks
CARLO.
Schwab is now offering a Heloc at 3.99%.
After hearing of people getting their HELOCS frozen, I tapped my HELOC which is prime minus 25 basis points. I took the proceeds and opened a one-year CD at Wachovia paying 4% APR for a 12 month CD (this was back in Dec 08). I’m actually making money on it and I have the emergency cash available. I don’t see interest rates rsing in the next year, given the economic depression.
I went to my local branch in Phoenix, Arizona and got a no cost HELOC thru MidFirst Bank. No prepayment penalties, no minimum draw, no annual fee or cancellation fee. If you care to confirm my findings, I worked with “Nick the Romanian”, as there are several Nick’s that work there. Took about 3 weeks to get it done, but he was very good to work with. I had to open a checking account to get the .5% discount.
Are HELOC available with Switzerland Banks