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Advantages/Disadvantages HELOC or Second Mortgage
Old 04-15-2009, 05:35 AM   #1
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Advantages/Disadvantages HELOC or Second Mortgage

I have some major home repairs coming up and am trying to figure the best way to pay for them without depleting my savings. I have about $200,000.00 in equity in my home and have no intention of moving. I need about $25,000.00 and need advice on the best/cheapest way to get it. Thanks

Mike
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Old 04-15-2009, 08:31 AM   #2
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Originally Posted by wrigley View Post
I have some major home repairs coming up and am trying to figure the best way to pay for them without depleting my savings. I have about $200,000.00 in equity in my home and have no intention of moving. I need about $25,000.00 and need advice on the best/cheapest way to get it. Thanks

Mike
$25,000 in home repairs is a lot! I can see why you call them major home repairs.

Do you presently have a mortgage and is the interest rate low enough to suit you? Maybe you could just refinance to pay off your present mortgage, and get a better interest rate plus $25K in the process, leaving you with $175K in equity.

I had a HELOC but closed it myself after I paid off my house and built up an adequate emergency fund. Luckily, my repairs have not been anywhere near as extensive as yours.
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Old 04-15-2009, 08:41 AM   #3
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$25,000 in home repairs is a lot! I can see why you call them major home repairs.
In our experience you can burn through $25K in a heartbeat if it involves any combination of kitchens, bathrooms, roofing, windows, HVAC, outside painting, concrete work, decent flooring -- and that's routine stuff, not necessarily mansion-enhancement.

We bought an older home against our desires (had a week to buy, few houses on the market back then). It is very nice but by no means extravagant. Sank $75K into it in a year or two: roof, landscaping, air, screen enclosure (almost a necessity in these parts), water heater, kitchen and bathroom re-do. But it brought up the appraised value nicely and a good chunk will probably will come back to us when we sell.

HELOC should work well in that situation if you have an aggressive repayment plan to back it up.
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Old 04-15-2009, 08:48 AM   #4
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I have some major home repairs coming up and am trying to figure the best way to pay for them without depleting my savings. I have about $200,000.00 in equity in my home and have no intention of moving. I need about $25,000.00 and need advice on the best/cheapest way to get it. Thanks
I think in this situation if your cash flow is good and your income stream is secure, a HELOC would work pretty well. In this environment I also agree with not draining your liquidity by drawing your savings way down, particularly with loan rates as low as they are.

I'd concentrate on paying it down with the extra cash flow you have each month, and when it was paid off I'd continue to put the same effort into building up your savings a little more so you wouldn't have to borrow for something like this in the future.
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Old 04-15-2009, 08:49 AM   #5
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Sank $75K into it in a year or two: roof, landscaping, air, screen enclosure (almost a necessity in these parts), water heater, kitchen and bathroom re-do.
Maybe we just define home repair differently. To me, the screen enclosure, landscaping, kitchen and bath re-do are things that I would put off as home improvements rather than repairs (other than possibly repairing a broken appliance in the kitchen or some such thing that actually needed immediate repair).

As for the rest, I got a complete HVAC replacement, inside and out with ducts and all, for $6K and my hot water heater plus installation was $800 so that would not amount to $75K for my house.

I guess my point is that maybe the OP could put off some of the repairs if they fall into the "it could be put off" category. Then he could save the money for them in the meantime, and pay in cash rather than increasing his debt burden.
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Old 04-15-2009, 10:57 AM   #6
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I need a new roof and an AC/heater! My current interest rate is 5.75% with about 14 years left on the mortgage. I could refinance 15 years to about 4.7% and cash out about $25,000.00. My job is secure and so is my wife's. My son (last child left at home that I support and know of! ) starts college in June.

I personally feel more comfortable with a loan/second mortgage that I know what the monthly payments will be every month. I'm rather anal about most things in my life, and have managed to stay married to the first AND ONLY spouse I will ever have for 26 years!

Is there that much difference between a HELOC and second mortgage when it comes to the interest rate? Thanks

Mike
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Old 04-15-2009, 11:30 AM   #7
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i think HELOC's are always variable rates, forgot the index they use
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Old 04-15-2009, 12:18 PM   #8
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My HELOC is fixed-rate. It has a draw period of 5 years and then converts to a 10 year loan.
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Old 04-15-2009, 02:32 PM   #9
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My HELOC is 7 years, interest only, variable rate tied to the WSJ prime rate. It has a really low rate now, but it can go up really quickly when the Fed starts raising rates.

If you are going to pay it off in the next year or so, a HELOC like that would be fine. Otherwise a fixed rate refi of your first mortgage might be worthwhile, and a more conservative choice.
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Old 04-16-2009, 07:05 PM   #10
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wrigley, we turn to PenFed for home equity loans when we need chunks of cash to throw into the Money Pit Known As A House...their fees are negligible and rates are low. They do require you to keep the loan for 2 years or there's a penalty, but if you could scare up that much dough in 2 years, you probably didn't need a loan anyway.

wrigley wrote, I'm rather anal about most things in my life, and have managed to stay married to the first AND ONLY spouse I will ever have for 26 years!
It's not "anal" to be monogamous, wrigley Even untidy people go in for it sometimes; ask me how I know At any rate, a long, happy marriage like yours is cause for congratulations
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Old 04-16-2009, 09:39 PM   #11
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I've burnt through over $40,000 in home repairs ( sea wall recap $14,000, new air conditioner $6,000 , kitchen mini redo $6,000 , tenting for termites $2,000, landscaping $4,000, patio $4,000 , painting $3,000 , bathroom repairs $2,000 ) . Houses are money pits . My last house in New Jersey was an older house and we were constantly throwing money into it . Heloc 's are great now that the rates are low but you really have to watch the rates .
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Old 04-17-2009, 06:06 AM   #12
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wrigley, we turn to PenFed for home equity loans when we need chunks of cash to throw into the Money Pit Known As A House...their fees are negligible and rates are low. They do require you to keep the loan for 2 years or there's a penalty, but if you could scare up that much dough in 2 years, you probably didn't need a loan anyway.

wrigley wrote, I'm rather anal about most things in my life, and have managed to stay married to the first AND ONLY spouse I will ever have for 26 years!
It's not "anal" to be monogamous, wrigley Even untidy people go in for it sometimes; ask me how I know At any rate, a long, happy marriage like yours is cause for congratulations
WOW....Pen Fed's rates are the lowest I've seen so far. I bank with NFCU and they can't come close to these rates.

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Old 04-17-2009, 09:46 AM   #13
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Those are good rates. As far as my preference, if you know you can pay it off within a year or two, I'd go with the adjustable HELOC at 2.75%. If it's going to take longer than that, I'd opt for the security of the fixed rate, even at the higher (but still quite good) 4.99% rate. Longer-term variable-rate debt scares the crap out of me.
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Old 04-17-2009, 12:31 PM   #14
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All depeds on what the Interest rate is and can you Repay it without causig problems
$25k is Chump Change for a Decent home.. Most Ktichens cost that Little and More..
I bought a retirement Home in 2003, took out a Mortgage to rehab it at 1.5% rate
While my Bond Portfolio was making me 10% ( LSBRX and EM Bonds)..It was a No Brainer..for me

And how long will it take you toe Resave that $25k if you use it out of your savings? And how much will your wife spend if she knows she has $25k less in savings?
vs having to pay off that 2nd Mortgage? Will she be more hesitant on wanting a New Car? Maybe you will work more and Spend less with the higher monthly committment..

it's easy to spend savings, but pretty tough to replace it..
AndWhat if that $200k Savings Can make 10-15% a yr for the next 5 yrs? It can pay off that 2nd Mortgage by then.. Buy EM Bonds and LSBRX fund..with it....
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Old 04-17-2009, 07:15 PM   #15
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This is a no brainer ... keep the home repairs within the home equity. Rates are very low. Stay fixed rate and you'll be fine. Variable ... not so much.

Would you mail a check to pay your mutual fund managment fee (or pay it from the fund)?
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Old 04-18-2009, 07:21 AM   #16
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And don't forget to deduct the home equity loan interest on your income tax! Making the effective rate even lower.
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Old 04-19-2009, 04:47 PM   #17
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"$25,000 in home repairs is a lot! I can see why you call them major home repairs.

Do you presently have a mortgage and is the interest rate low enough to suit you? Maybe you could just refinance to pay off your present mortgage, and get a better interest rate plus $25K in the process, leaving you with $175K in equity.

I had a HELOC but closed it myself after I paid off my house and built up an adequate emergency fund. Luckily, my repairs have not been anywhere near as extensive as yours."
Well if your going to do that, you might as well refinance the whole thing so that the closing costs(for a cash out) gets distributed over more money. And then take the cashed out money and put it in a rewards checking like Advanta, AmericaNet, or Redneck who are all paying 5.25% interest. Depending on the amount of deduction there will be at least a small arbitragible event. And you get the liqudity.

Better answer use the HELOC man, because closing costs, fees, etc. suck. HELOC it all out at about 2.5-3% variable and arbitrage that. When the variable interst rises use the money in the rewards checking to pay off the HELOC loan.
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Old 04-20-2009, 11:15 AM   #18
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"$25,000 in home repairs is a lot! I can see why you call them major home repairs.

Do you presently have a mortgage and is the interest rate low enough to suit you? Maybe you could just refinance to pay off your present mortgage, and get a better interest rate plus $25K in the process, leaving you with $175K in equity.

I had a HELOC but closed it myself after I paid off my house and built up an adequate emergency fund. Luckily, my repairs have not been anywhere near as extensive as yours."
Well if your going to do that, you might as well refinance the whole thing so that the closing costs(for a cash out) gets distributed over more money. And then take the cashed out money and put it in a rewards checking like Advanta, AmericaNet, or Redneck who are all paying 5.25% interest. Depending on the amount of deduction there will be at least a small arbitragible event. And you get the liqudity.

Better answer use the HELOC man, because closing costs, fees, etc. suck. HELOC it all out at about 2.5-3% variable and arbitrage that. When the variable interst rises use the money in the rewards checking to pay off the HELOC loan.
My mortgage payment is very comfy as it is. The 2nd mortgae rate is %4.99 for up to 20 years, no fees, and no penalty as long as I don't pay it back within the first 24 months.

A total refi is %4.375 for 15 years with roughly $2,800.00 in fees. The difference in the payments is about $80.00 a month.

Mike
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Old 04-21-2009, 08:14 PM   #19
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By total refinance do you mean one that cashes out all the equity, cashes out 25K in equity, or has no cash out?

It appears that you would be beneficial to refinance because of the lower interest rate(since I see that you are paying 5.75). Cash out all the equity, pay for the home repairs, and put the excess in a reward checking account like the ones I have mentioned. Besides the 10 or so required debits a month(of which you pay for things that are less than $10, like gum) don't touch that money. If reward checking accounts around the country drop below 4.375(adjusted by tax deduction) than lump sum all the money back into mortgage. But the likelyhood of that is like 1/10000.

Hope that helps.

Edit: Don't ever put that cashed out money into a riskable investment such as stocks. You are removing out equity, that is not something you want to risk. That is why reward checking paying 5.25 is the best option for it right now, and any other option should be along the same lines. No risk and also should be liquid.
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