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Advantages/Disadvantages HELOC or Second Mortgage
04-15-2009, 04:35 AM
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#1
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Full time employment: Posting here.
Join Date: Nov 2008
Location: Jacksonville
Posts: 637
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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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04-15-2009, 07:31 AM
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#2
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Moderator Emeritus
Join Date: Jan 2007
Location: New Orleans
Posts: 47,501
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Quote:
Originally Posted by wrigley
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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$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.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities. - - H. Melville, 1851.
Happily retired since 2009, at age 61. Best years of my life by far!
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04-15-2009, 07:41 AM
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#3
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Moderator Emeritus
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
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Quote:
Originally Posted by Want2retire
$25,000 in home repairs is a lot! I can see why you call them major home repairs.
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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.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.
As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
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04-15-2009, 07:48 AM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,483
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Quote:
Originally Posted by wrigley
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
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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.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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04-15-2009, 07:49 AM
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#5
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Moderator Emeritus
Join Date: Jan 2007
Location: New Orleans
Posts: 47,501
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Quote:
Originally Posted by Rich_in_Tampa
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.
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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.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities. - - H. Melville, 1851.
Happily retired since 2009, at age 61. Best years of my life by far!
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04-15-2009, 09:57 AM
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#6
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Full time employment: Posting here.
Join Date: Nov 2008
Location: Jacksonville
Posts: 637
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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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04-15-2009, 10:30 AM
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#7
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Thinks s/he gets paid by the post
Join Date: Jun 2005
Posts: 1,543
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i think HELOC's are always variable rates, forgot the index they use
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04-15-2009, 11:18 AM
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#8
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Thinks s/he gets paid by the post
Join Date: Jan 2004
Posts: 2,049
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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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04-15-2009, 01:32 PM
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#9
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
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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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04-16-2009, 06:05 PM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Dec 2008
Posts: 12,660
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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
__________________
If you understood everything I say, you'd be me ~ Miles Davis
'There is only one success – to be able to spend your life in your own way.’ Christopher Morley.
Even a blind clock finds an acorn twice a day.
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04-16-2009, 08:39 PM
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#11
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Gone but not forgotten
Join Date: Jan 2007
Location: Sarasota,fl.
Posts: 11,447
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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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04-17-2009, 05:06 AM
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#12
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Full time employment: Posting here.
Join Date: Nov 2008
Location: Jacksonville
Posts: 637
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Quote:
Originally Posted by Amethyst
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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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.
Mike
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04-17-2009, 08:46 AM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,483
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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.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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04-17-2009, 11:31 AM
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#14
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Recycles dryer sheets
Join Date: Oct 2008
Posts: 295
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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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04-17-2009, 06:15 PM
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#15
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Thinks s/he gets paid by the post
Join Date: Mar 2005
Posts: 2,603
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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)?
__________________
FIRE'd since 2005
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04-18-2009, 06:21 AM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Dec 2008
Posts: 12,660
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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.
__________________
If you understood everything I say, you'd be me ~ Miles Davis
'There is only one success – to be able to spend your life in your own way.’ Christopher Morley.
Even a blind clock finds an acorn twice a day.
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04-19-2009, 03:47 PM
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#17
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Recycles dryer sheets
Join Date: Mar 2009
Posts: 164
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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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04-20-2009, 10:15 AM
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#18
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Full time employment: Posting here.
Join Date: Nov 2008
Location: Jacksonville
Posts: 637
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Quote:
Originally Posted by dshibb
"$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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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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04-21-2009, 07:14 PM
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#19
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Recycles dryer sheets
Join Date: Mar 2009
Posts: 164
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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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