4.99% PenFed Home Equity Loan

[twaddle]

This PenFed Home Equity loan looks like a good deal. 10 years at 4.99%, no fees AFAICT.

https://www.penfed.org/productsAndRates/mortgages/homeEquity.asp

Edit: I just noticed that fatwallet has a discussion on this here:

PenFed January Promotions and Changes - CD Rates, Cashback Credit Card, Auto Loan Rates

 

[clifp]

I don't get this company. They give me 6% on CD, and now they want to loan money to me at 4.99%. I thought my 4.875% mortgage was too good to be true but this a very close 2nd. I think this must be a CIA front organization that is selling heroin from Afghanistan or some such other crazy scheme.

 

[brewer12345]

PenFed isn't a bank. They are a credit union with a very specific customer base. They hae a ton of deposits in "share draft accounts" (basically checking) that they pay bukis interest on. So mix that ad some higher rate CDs and the blended cost of funds is quite low. And they have very low loan losses/delinquency because their loans are sensibly underwritten and the bulk of the customer base is employed by Uncle Sam (military, no layoffs to worry about.

4.99% is just at my current mortgage rate. Knock another 50 BP off and I will be calling to do the deal...

 

[clifp]

I am very tempted to do this deal. I have lots of equity in my house and small <$200K mortgage at 4.875%. It looks like you can still 5+ year CD paying between 5.25% and 5.75% so that it is roughly 50 BP spread or $500 per $100K/year. The problem is finding intermediate term investments that pay over 5%. The Vanguard High Yield is at 8.23% and many year history of very consistent distributions it seems I could put a 1/3 in long term CD ladder 1/3 in High Yield 1/3 in the Vanguard MM and just wait for CD promotions.

 

[twaddle]

ISM and OSM mature in about 10 years.

 

[brewer12345]

I am very tempted to do this deal. I have lots of equity in my house and small <$200K mortgage at 4.875%. It looks like you can still 5+ year CD paying between 5.25% and 5.75% so that it is roughly 50 BP spread or $500 per $100K/year. The problem is finding intermediate term investments that pay over 5%. The Vanguard High Yield is at 8.23% and many year history of very consistent distributions it seems I could put a 1/3 in long term CD ladder 1/3 in High Yield 1/3 in the Vanguard MM and just wait for CD promotions.

Congratulations! Youhave just replicated the essential business plan of every life insurance company in the known world.

 

[CybrMike]

I just took em up on it. Had a HELOC that would expire in a couple years. REFIed into 10 year equity loan at 4.99%. Giving money away, I tell ya.

 

[Nords]

Congratulations! Youhave just replicated the essential business plan of every life insurance company in the known world.

It's like stoozing without the fine print, deadline tripwires, and credit-rating impacts. It's like playing blackjack without having to worry about pit bosses or card-counting.

I'm having a hard time distinguishing between Clif's investing plan and my habit of picking up pennies. Both are profitably virtuous and I guess there are different amounts of effort but otherwise there's not much of an incentive either way. Is it worth picking up $500K in debt for an extra $2500/year? Where does this cross the line between keeping a mortgage and emulating Long-Term Capital Management?

Why is PenFed being so nice to us instead of buying their own darn institutional shares of Vanguard's high-yield funds?

I guess my reluctance is some ill-defined fear of being caught holding the default hot potato.

EDIT: Ah, I had to do the math.

The equity loan isn't principal at a fixed interest rate with a balloon payment at the end of the term. According to their payment calculator, it's a regular mortgage that requires a repayment of principal every month as well as interest. So although one could "profit" from the interest-rate spread, the declining principal balance actually reduces the APY below a stated CD yield. Mortgage-interest tax deductions, AMT limits, and a host of other financial maneuvers make this a tough spreadsheet.

The HELOC adjusts its interest rate quarterly. So although one could lock in a long-term CD with PenFed's money, there's one heckuva risk on the HELOC payments in a rising interest-rate environment. I'm not gonna try to arb the Fed for $2500/year.

Does Vanguard's high-yield bond APY reflect a return of principal, or is that strictly interest & cap gains?

 

[clifp]

Congratulations! Youhave just replicated the essential business plan of every life insurance company in the known world.

LOL, not exactly. I have not figured out the part where I deny the claim (don't pay back the loan) based on Section 17 paragraph 2 clause B. Lender agrees to forgive loan payment for any month when average (High Temp - Low Temp) is less than 25 degree Farenheit.

 

[twaddle]

I guess my reluctance is some ill-defined fear of being caught holding the default hot potato.

If rates get really low, you'll kick yourself. PenFed gave me a rate below 2% on my HELOC several years ago. I maxed it out, of course.

There's a small penalty clause in this one if you pay it off in less than two years, I think.

 

[clifp]

It's like stoozing without the fine print, deadline tripwires, and credit-rating impacts. It's like playing blackjack without having to worry about pit bosses or card-counting.

I'm having a hard time distinguishing between Clif's investing plan and my habit of picking up pennies. Both are profitably virtuous and I guess there are different amounts of effort but otherwise there's not much of an incentive either way. Is it worth picking up $500K in debt for an extra $2500/year? Where does this cross the line between keeping a mortgage and emulating Long-Term Capital Management?

Why is PenFed being so nice to us instead of buying their own darn institutional shares of Vanguard's high-yield funds?

I guess my reluctance is some ill-defined fear of being caught holding the default hot potato.

This from a guy who refi to invest in the market. I guess it could be worse you could refi to invest Hawaii tech companies . Actually, I am looking at taking on $300K for extra $3k a year, but I have to admit it sound like a hedge fund.

 

[twaddle]

I am looking at taking on $300K for extra $3k a year, but I have to admit it sound like a hedge fund.

Anything over $100K doesn't give you a tax break, right?

 

[clifp]

Anything over $100K doesn't give you a tax break, right?

Darn you are right. It is $1 million but only if you use the money to improve the home and not trying to play hedge fund manager. Damn Uncle Sam spoiling my Xmas present!

 

[Nords]

This from a guy who refi to invest in the market. I guess it could be worse you could refi to invest Hawaii tech companies . Actually, I am looking at taking on $300K for extra $3k a year, but I have to admit it sound like a hedge fund.

Well, exactly. We've already boosted our ER portfolio's survival with plenty of equity funded by debt. How leveraged do we want to get?

I can plug a spreadsheet that shows the small-cap value index shares we've bought with the mortgage money are worth more than the principal and they're handily beating CD rates. But for a $335K PenFed loan at 4.99% over just 10 years we'd be paying $3568/month to PenFed for the privilege of earning $1480/month from NFCU. That carry trade's a little harder than a 30-year mortgage and the odds are against equities beating that rate over just 10 years. While the CD yields 5.3% APY, I suspect the APY on a declining balance is a good bit lower-- although I'm not going to build a spreadsheet to figure it out.

A [-]real nuke[/-] trader with brass cojones would take out $500K and buy Berkshire Hathaway shares or Intel options. But the money's not necessary to our ER plan and I'm not sure what I'd do with the [-]filthy lucre[/-] profits.

I think Hawaii [-]Angles[/-] Angels is a good deal worth signing up for. I still have a few nitpick questions on the tax-credit details but this is a great opportunity for an education at a reasonable tuition. It'll certainly help keep me from getting duped into chasing Ponzi schemes in my 80s. I asked Miyuki for more info and after the holidays I'll chase it down. See you next month!

 

[FUEGO]

Looks like a potentially good candidate for a Refi of my ARM set to readjust from 4.65 to 5.65 in 7 months. 4.65 is the lowest my adjustable rate can ever go to.

I plan on paying off in ~10 years anyway, so it might be time to make the leap. Basically use the HE loan as a 1st mortgage. I can't see any downside to this other than the 2 year prepay penalty of closing costs if rates take a big dip and I want to refinance again within 2 years to take advantage of even lower rates.

 

[brewer12345]

Looks like a potentially good candidate for a Refi of my ARM set to readjust from 4.65 to 5.65 in 7 months. 4.65 is the lowest my adjustable rate can ever go to.

I plan on paying off in ~10 years anyway, so it might be time to make the leap. Basically use the HE loan as a 1st mortgage. I can't see any downside to this other than the 2 year prepay penalty of closing costs if rates take a big dip and I want to refinance again within 2 years to take advantage of even lower rates.

Sounds like a good idea. If they whack rates any further, I would take a pen fed HEL to refi my current note, since 10 years is about what I have left to go.

 

[jazz4cash]

PenFed's Board of Directors have approved a CD promotion in January with rates over 5% APY -- probably closer to 5% than 6%.


So....I guess this means no 6.25 seven year CD comming up in Jan? Darn!

 

[Den26]

Does anyone know if there are any fees involved with this HEL, other than the $20 to join PenFed? All I want is their home equity loan, not their checking, or any other accounts. This seems like a fantastic deal, and yet I never heard of PenFed.

 

[clifp]

According to the website no fees as long as you keep the loan for at least 2 years. So if rates drop to 4% next year it will probably cost you $500-$1000, but I wouldn't hold my breath waiting for that to happen.

Penfed is part of the holy trinity of this board, the other two companies are Vanguard and Costco. I too was ignorant of Penfed before coming to this board, but now I am enlightened.

Merry Christmas

 

[jazz4cash]

Does anyone know if there are any fees involved with this HEL, other than the $20 to join PenFed? All I want is their home equity loan, not their checking, or any other accounts. This seems like a fantastic deal, and yet I never heard of PenFed.

I joined PenFed last Jan for the 6.25 CD. Nearly all year they've been running 5.99 HEL with zero closing costs. We took one in June...very easy and no surprises. This 4.99 deal looks great.

 

[FUEGO]

I made the plunge. I just submitted an application to refinance my current ARM into the home equity loan at 4.99% for 10 years. That should save me $10,000 or so in interest over the next ten years (assuming they approve me). Relatively painless - took maybe 2 hours to set up the account and apply.

 

[flipstress]

Tax Deduction?

FUEGO (and others), I am interested in paying off my 5.25% mortgage rate with this 4.99% HEL, since I have about 10 years left on the mortgage.

Would the interest on the HEL qualify as an itemized deduction on the IRS Form 1040 Schedule A, falling into the same spot as mortgage interest?

Do I specifically tell PenFed that I want to refinance (and so fill out the proper paperwork), so as to get the itemized deduction for the interest?

 

[flipstress]

Yes, deduction!

I am answering my own question.

I looked at the 2007 instructions for Schedule A, and it says right so on page 5 re: Home Mortgage Interest, Lines 10 and 11 that
"A home mortgage is any loan that is secured by your main home or second home. It includes first and second mortgages, home equity loans, and refinanced mortgages."

PenFed, here I come! Thanks, twaddle, for posting about this.

 

[FUEGO]

You'll have to get a "home equity loan", not a refinance mortgage. But you can pay off your mortgage in full from the proceeds of the home equity loan, making your HEL a first mortgage. I asked them this question and they told me that it is okay to pay off your first mortage in full.

FYI for everyone - car loans are 5.29%. Maybe not the best but very low IMHO.

 

[Den26]

I applied online today, and was approved within 10 minutes. This is a very good deal. I had a HELOC with my local credit union at 7.75% variable, tied to the prime rate. But this is FIXED, at 4.99%. Thank you, everyone on this thread.