Author Topic: Home equity line question (Read 2729 times)

ChadTower · « **on:** January 26, 2006, 10:29:31 pm »

So, related to all my talk about finishing the basement, we've been trying to get a home equity line established. Our credit is decent but has spots. We've been approved by a lender for $50k cap (which isn't even half our equity) at prime + 1.5.

That feels a little high to me, but admittedly, I'm not an expert. That's 8.75. Is that too high? Should I keep looking around? Our local bank, which turned us down btw, was quoting at prime - .25... yet when I mentioned that to the guy today he said "no bank would lend below prime, they won't make any money". Not sure I believe that.

deadmoney5 · « **Reply #1 on:** January 26, 2006, 10:51:01 pm »

I think that's ok for a HELOC...

Crazy Cooter · « **Reply #2 on:** January 26, 2006, 11:19:09 pm »

The banks will always make money. Whoever approved you was trying to confuse you on what "Prime" means. "Prime rate" is the rate that a bank lends to people they trust. It's not what they "owe" for borrowing the money, assuming they don't already have the cash on hand. Banks can (and lately often do) drop below the prime rate because they can't get an acceptable rate elsewhere or feel the have a secure investment in, for example, real estate.

Basically, the guy lied and was trying to pressure you into taking his deal IMO. I would try a few more banks and see if they will bite on your offer at prime.

One thing to really watch for is if it's a variable rate loan. Back ~1980 the prime rate got up to 20%.

ChadTower · « **Reply #3 on:** January 27, 2006, 07:25:15 am »

I do believe what he said was that it moves with Prime... so that would be variable, I suppose.

ChadTower · « **Reply #4 on:** January 27, 2006, 08:10:41 am »

Well, anyway, since the guy was so damn aggressive and a couple of the things he told me seem to be untrue ("no bank will lend below prime, they'd make no money"), I've told him to come down a full point as a requirement to continue the discussion.

mccoy178 · « **Reply #5 on:** January 27, 2006, 08:56:19 am »

Without steller credit, that percentage is probably good. I would check out some online calculators and see if the amount you want to play with is worth the interest and payment level. You would need a fairly decent debt to income ratio to get a better deal. I don't know if we'll see interest levels again(at least for a long time), like the ones we had the past few years.

ChadTower · « **Reply #6 on:** January 27, 2006, 08:57:45 am »

Prime + 1.5, though? The 8.75 isn't even really relevant, it's the rate calculation...

mccoy178 · « **Reply #7 on:** January 27, 2006, 09:05:49 am »

With the initial amount of your first mortgage, what will the percent borrowed to the percent value be? Otherwise, will this credit line + 1st mortgage roughly equal the value of the home? That's what I based my opinion on. If you only went up to 90% or 80%, you should be able to get a better percentage.

ChadTower · « **Reply #8 on:** January 27, 2006, 09:10:31 am »

I have probably $100-125k in equity and the line I'm applying for is $35-40k. I wouldn't be going anywhere near 80 or 90%.

mccoy178 · « **Reply #9 on:** January 27, 2006, 09:13:43 am »

I have no clue then. I was talking out my butt there.

Hoopz · « **Reply #10 on:** January 27, 2006, 09:15:41 am »

That rate sucks. I got mine a few years ago at prime + 1/4. If they say your credit score is too low or whatever, then walk away. You can find something better.

I would consider looking at variable also. The FOMC minutes lately have indicated that the Fed may raise rates another 1/4 and then look to hold them steady. Depending on the amount you borrow AND your plan to pay it off, this may work out better.

If you don't have a plan yet to re-pay it, don't make any decision yet. You need an exit strategy for the loan developed before you enter into the agreement. Most people don't do that and its a bigger mistake than almost anything else.

ChadTower · « **Reply #11 on:** January 27, 2006, 09:19:32 am »

It's not a LOAN in that sense, it's an equity line. Our basic strategy in the short term is to use it to pay off other debts and then use the cash that was going to those debts towards the line payment. The savings there alone could end up paying for much of what we spend on finishing the basement and the home improvements.

Hoopz · « **Reply #12 on:** January 27, 2006, 09:28:42 am »

Right. The interest will be deductible which works out better for you too. But you still need to determine what your time frame is to pay off whatever you use of the line of credit. If its 5 years or 10 years etc.

If you work that plan out, you can determine what rate type (variable or fixed) that you want to pursue. Variable will be lower but the longer you plan to use the line of credit, the more risk you assume. Fixed will be higher initially but may be better if you plan to pay it back shorter term.

ChadTower · « **Reply #13 on:** January 27, 2006, 09:54:09 am »

Given this advice, this is what I come away with:

We are planning on actually using roughly 20k of the credit. $9000 will be used to pay off existing credit card debts, consolidating them and substantially lowering the interest.

The rest of what we plan on using is all home improvement items. We are going to finish the basement (I will do the majority of the work), repaint, do some landscaping, etc etc. No major renovations or anything and this, over the course of the next couple of years, will run around $10k eventually but will also improve our home and our standard of living.

The rest of that credit line, which I'm trying to make $15-20k, will only be used in dire emergency. By emergency I mean I lost my job and have been unemployed for a few months and can no longer make the mortgage payment using liquid assets. Call it a way of presecuring credit I could need at a time in which I could never get it.

A loan calculator at 8.75 with a ten year term puts $20k at $250/month. When you consider we are currently paying well over $300/month on that credit card debt ALONE, which is only $9k rather than $20k, this certainly does seem to work in our favor even in the short run. At our current CREDIT CARD payment level, it works out to 6 years repayment for the full $20k amount rather than just the $9k of credit card payments.

Thanks for the advice, HoopZ, that actually did solidify a lot of it in my mind. 8.75 really isn't all that bad in these terms if prime can stay steady for a few years.

Hoopz · « **Reply #14 on:** January 27, 2006, 10:16:15 am »

Glad to help. Working the math out can help people see how it all plays out.

And shop around still. Fees, closing costs etc can vary substantially from place to place. Dont stop yourself from negotiating with someone. Ask for a detailed breakdown of each and every fee that you will pay before you decide anything. They will try and tag you for all sorts of fees. Try and negotiate all of them.

mccoy178 · « **Reply #15 on:** January 27, 2006, 10:20:56 am »

So what I said wasn't all that bad. 8.75 is not a killer rate one way or the other. If you eliminate your credit debt, and improve your credit score and debt to income ratio, you may be able to consolidate your mortgages. You possibly could combine your equity line balance and your remaining mortgage into a fifteen year in a year or two for less than what you would pay for both now individually.

Stingray · « **Reply #16 on:** January 27, 2006, 10:22:06 am »

I'm a finacial doofus, so I have no real advice to offer on this topic. However, I just got a home equity loan at 7% fixed earlier this month. I have no idea what if anything you can determine from that info.

-S

ChadTower · « **Reply #17 on:** January 27, 2006, 10:25:24 am »

Not much, since a LOAN is different than a LINE, really.

The LOAN doesn't suit our needs for the "dire emergency fund availability" concept.

Mccoy, not a bad idea, but I'm not touching our first mortgage with a 20 foot pole. It's sitting at 5.875%.

mccoy178 · « **Reply #18 on:** January 27, 2006, 10:25:39 am »

Chad, what is your interest rate on your first loan? If you have a thirty year loan with a lower interest rate, you may want to plug in the numbers into a calculator and see if there is any advantage to a fifteen at a little higher interest. My wife and I locked our house in at 5.375% for fifteen years, and it will save us about 100,000 over going 30 years. I know the rates aren't that good anymore, and I know you bought in 2001 I believe, so that is why I said the fifteen with higher interest as you will no doubt be two or more points higher.

Stingray · « **Reply #19 on:** January 27, 2006, 10:29:06 am »

Quote from: ChadTower on January 27, 2006, 10:25:24 am

Not much, since a LOAN is different than a LINE, really.

Being that I'm quite the doofus as stated, I don't know the difference.

-S

Hoopz · « **Reply #20 on:** January 27, 2006, 10:30:20 am »

Yes, do the math on 15 at a higher rate compared to your 30 at 5 3/4 (metrics debate again?? :-) )

As McCoy said, you need to use the calcs to figure out where you come out ahead. After X number of years, you will come out better off with the 15 year mortgage. It all comes down to how long you expect to be in your house. With the work that you want to put into it, I would imagine that its longer than 5 years and probably 10+. Factor in kids going to college, or leaving the house etc.

Exit strategy once again.

mccoy178 · « **Reply #21 on:** January 27, 2006, 10:33:00 am »

That was our thought with the fifteen. We've been here four years and have at least six years to go. We should have it paid in 12 if we stay. So finances for me became a lot less stressful when I keep them in perspective. I have to put the leg work in now, then have some wiggle room later.

ChadTower · « **Reply #22 on:** January 27, 2006, 10:38:17 am »

I'm pretty disciplined financially, so I'm actually taking the same approach manually. I'm sticking with the 30 at 5.875, which has the lower minimum payment, but making extra payments towards principal whenever I can. It's not quite as good as the 15 with lower interest, but I am all about being prepared for financial bad times, and that lower mandatory payment is important for me.

ChadTower · « **Reply #23 on:** January 27, 2006, 04:05:26 pm »

Well, looks like that first guy was full of crap... I'm in app process with two other lenders now, one talking about prime - 0.05 and the other talking about prime - 0.75.

Prime + 1.5 my BEHIND.

Hoopz · « **Reply #24 on:** January 27, 2006, 05:35:59 pm »

Thought he had a sucker. Nice that people with net access can explore their options more easily and quickly than 15 years ago.

Good job.

Kremmit · « **Reply #25 on:** January 27, 2006, 10:51:04 pm »

You might try www.eloan.com. I sign papers tomorrow for a HELOC at Prime +0.25 from them. They said if my credit scores were sixteen points higher, it would have gone down to something under prime. I probably could have massaged my credit a little bit over a few months and gotten the extra 16 points, but I don't expect to keep the HELOC more than a few months anyway.

For the doofus:

With a Loan, you take out the full amount, and make the same payment every month until it's paid off, just like any other mortgage.

With a Line, you take out however much you want, up to the amount of the line, and make payments only on what you have actually used, much like a credit card.

DrewKaree · « **Reply #26 on:** January 28, 2006, 12:49:56 am »

Stingray, your informative and helpful post caused me to realize 7% was something that was in your post. Please continue more of these brilliantly worded posts, as I feel myself getting smarterer by teh werd and stuff.

Zakk · « **Reply #27 on:** January 28, 2006, 04:32:58 pm »

Considering the line is secured by the equity in the home, your rate should definitely be less than prime.

However, I do suggest that you take as small a 'line' as you possibly can. Remember that when someone checks your credit they are going to see that you have a credit line of $X dollars. That can count against you. Lenders look at an available amount as being totally utilized (since you could go out tomorrow and rack up your credit to the limit). They are often lenient on mortgages, but lines of credit are a different story, expecially when they are secured against your home, which by the sounds of it is your only source of real equity.

You say you are good with money, but how then did you get to the point where you had to take equity out of your home to pay off loans/debts? I ask because you should really look at your spending habits. You might just go out and spend all the money in your line of credit. Then where are you at.

When someone has to cash in home equity to pay off debts, alarm bells should be going off. However, I don't even agree with home equity loans to do improvements. It's self defeating. You have a nicer house, but you owe more on it. If you can wait to do the upgrades until you can actually pay for it in cash, do so. Concentrate on paying your debts first, before you go spend money somewhere else. The motto I go by is "no debit, no getit!"

Sorry, don't mean to lecture, I just think people nowdays are way too lax with debt, and bastard banks are too easy at eating away at people's equity, as long as they can get interest payments out of it.

Hoopz · « **Reply #28 on:** January 28, 2006, 05:57:49 pm »

Zakk's points are correct. However, for most people a home is the biggest purchase and also the biggest asset. If he is using the funds to improve the home AND plans to live their for a substantial amount of time, then he should consider this as an alternative.

One reason that a home is a lot of people's best asset is not because they spend a lot money on it, but rather because they don't trade it like they do their equity, bond, and mutual fund portfolios. So there is little risk of them screwing themselves because of bad decisions.

If they can save money on the interest that they are paying AND have it be tax deductible, then they should consider this step. Home improvements don't immediately raise the value of the home dollar for dollar on the amount spent to improve it. But, over time, it will appreciate (all things being equal).

Regulating spending is always good to review. Without knowing your entire financial picture, no one can say definitely yes or no. Debt is not necessarily a bad thing. It depends on the entire gambit of your financial picture.

If you haven't figure out your time horizon to be in the home (exit strategy point again), then don't consider this idea at all. I doubt you would be making home improvements only to sell it in a couple years, but people do that without realizing that they won't get as much as they put into it.

ChadTower · « **Reply #29 on:** January 28, 2006, 11:46:18 pm »

The credit card debt that we have got racked up about two years ago when I was unemployed. We paid for a lot of things like car repairs and monthly bills that way while trying to string out our savings until I found a new job. That did eventually happen, but it's taking a long time to pay off. It wasn't spending habits that built that up. It was a hard spot.

AtomSmasher · « **Reply #30 on:** January 29, 2006, 03:34:30 am »

I'm currently buying a new house that I'm still waiting to be built, but I went with 100% financing and got around 6.5% on the 80% and 8.5% on the 20%. It's been a few months since I got those quotes and rates have probably changed since then, but I'd say shop around because you should be able to get a better rate. (And for those about to tell me 100% financing is a bad idea, the value of the house has already increased around $40,000 since I locked in my price and its still over 6 months from when it'll be finished. This means by the time its close enough to being done to be appraised, I will probably only need to borrower 80% of its value to pay for it )

Also, since some people were talking about home improvements. In general, improving a house only increases the value around $0.50 to every $1 you spend, unless you do the work yourself. That means you should only upgrade things that you want to have, not because you think it'll help the house sell (note: I do not include adding square footage to the house when I say upgrades because that often can add more value then you pay)

Zakk · « **Reply #31 on:** January 29, 2006, 12:15:11 pm »

Rates here are currently about 4.9% for a fixed 5 year term, amortized over 25 years. 100% financing would probably pop you over 5%, with a premium for any amount less than 25% down (so 100% financing would have a larger 'insurance' payment on the loan).

Getting 100% financing on a home is fine, generally speaking you will get your money back in the long run via appreciation of the property. It's when people start eating into accumulated equity and paying the bank interst on equity that they already had, that I sound a warning cry. Screw the banks, they have enough money, it's us small guys that need it, not them. I don't like people looking at a house as a piggy bank. I see cracked piggy banks all over this city, and I have to deal with a lot of people that want to sell a home, but can't afford to do so because they owe more on it than they have in it.

Kremmit · « **Reply #32 on:** January 30, 2006, 12:53:34 am »

I didn't take my line to pay debts or do improvements. I'm buying some acreage with it. Then I'm selling the current place, paying off the equity line and moving onto the new acreage. I hope to make enough on the sale to drop a cheap modular in and come out the other side mortgage free.

ChadTower · « **Reply #33 on:** January 30, 2006, 08:58:58 am »

That so would not work here... even an uncleared half acre would cost 175,000.

ChadTower · « **Reply #34 on:** January 30, 2006, 02:21:49 pm »

Well that was annoying. The guy I was talking to Friday who said he could probably get me prime - 0.75 actually got me prime + 0.75.

That's not what I was looking for... must keep looking, I guess.


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