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HELOC question
Old 10-08-2005, 04:45 PM   #1
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HELOC question

O.K., I'm not proud of this, but there is one section of my financial picture I am concerned about. I have a HELOC of about 35k on my house. We got phased out of the student loan deduction and paid our loans off with it. Now the thing is, it's a variable rate loan, and with Mr. Greenspan raising rates every quarter, the payment is constantly going up. Plus, the minimum payment is interest only, so we aren't getting anywhere if we only pay that. Right now it's at ~6.25% and payments are around 180/month. I can fix it at 7% for 20 years with a payment of about $270. As a side bar, I have 15k just parked in EmigrantDirect at 4% that I guess I could close out and pay down this HELOC during the refinance process for a payment of ~$180, or just lump it on and keep going with what I've got. The one thing I don't like about that option is that would leave us with just the 12 grand in savings for emergencies (plus the IRAs and 401ks, but I'd really hate to tap those!). Advice, anyone?
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Re: HELOC question
Old 10-08-2005, 04:51 PM   #2
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Re: HELOC question

Quote:
Originally Posted by Laurence
O.K., I'm not proud of this, but there is one section of my financial picture I am concerned about.* I have a HELOC of about 35k on my house.* We got phased out of the student loan deduction and paid our loans off with it.* Now the thing is, it's a variable rate loan, and with Mr. Greenspan raising rates every quarter, the payment is constantly going up.* Plus, the minimum payment is interest only, so we aren't getting anywhere if we only pay that.* Right now it's at ~6.25% and payments are around 180/month.* I can fix it at 7% for 20 years with a payment of about $270.* As a side bar, I have 15k just parked in EmigrantDirect at 4% that I guess I could close out and pay down this HELOC during the refinance process for a payment of ~$180, or just lump it on and keep going with what I've got.* The one thing I don't like about that option is that would leave us with just the 12 grand in savings for emergencies (plus the IRAs and 401ks, but I'd really hate to tap those!).* Advice, anyone?*
Well, in our case the "emergency fund" is my credit cards. That's
it! If it's a real emergency, I have enough credit available to
leverage my way to the grave. Soooooooo, I never need to
confront these decisions. Others may have a different view.

JG
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Re: HELOC question
Old 10-08-2005, 04:51 PM   #3
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Re: HELOC question

I had the same issue three months ago. My payments on the HELOC kept going up. In addition, HELOC are FICO score killers (HELOC's are considered to be revolving credit)if your outstanding balance = loan amount. I re-fi'd to a 7 year fixed and just combined the first and HELOC. I have over 70K in ING, so I could've easily paid off the HELOC. Now I'm very happy with what I have. My new payment amount is actually lower than the original first and second.
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Re: HELOC question
Old 10-08-2005, 08:09 PM   #4
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Re: HELOC question

I also use my credit cards for short-term loans (balance transfers) and drop the rest into a money market account. Some people temp. put off retirement plan contributions to pay off a debt and get rid of it.
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Re: HELOC question
Old 10-08-2005, 10:10 PM   #5
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Re: HELOC question

The current consensus forecast is that the fed funds rate goes up to 4.5% by the middle of next year. That's +75bp from current levels, which puts you're HELOC right at the 7% level you could fix at now. However, Bill Gross and some others think the fed may have to reverse course and start CUTTING rates sometime soon. That may not be a bad bet considering the squeeze higher short rates will put on floating rate mortgage borrowers.

It's a tough call but I think if I were in your position I'd let it ride and bet that the fed stops at or around 4.5%. In the meantime I'd make a concerted effort to get the balance down. You might consider diverting SOME of the Emigrant cash for this purpose but I think you're right to want to keep a reasonable emergency fund on hand.

Good luck!
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Re: HELOC question
Old 10-09-2005, 12:09 AM   #6
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Re: HELOC question

I'd use $10k of the Emigrant acct to pay down to a more manageable $25k. Didn't you get a big raise recently? Could you use it to double or triple your HELOC payments and get that sucka outta the way within a couple of years--while adding a bit every month to replenish the Emigrant acct?

IIRC, your wife also works. I might not recommend this if you were the sole breadwinner.
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Re: HELOC question
Old 10-09-2005, 01:27 AM   #7
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Re: HELOC question

If you have a HELOC, why wouldn't you use that as your emergency source of funds? The interest rate will always be cheaper than a credit card. Just pay the thing down. If rates go down, and you feel like you need more cash, you can always write yourself a HELOC check, right? And if rates go up, you'll feel like you're both smart and debt-free.
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Re: HELOC question
Old 10-09-2005, 02:00 AM   #8
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Re: HELOC question

Nothing to be ashamed of ... many of us have been there.

I agree with wab.* What is your total credit line?* And, if I recall, if you fix the interest rate and amortize, are you also giving up your line of credit, and converting to a fully amortized, fixed principal loan?* I wouldn't want to give up an existing credit line.

Would also be tempted to use the money market cash to pay this down, and do my best to amortize down the loan principal as quickly as possible ... again, recognizing the HELOC can serve as emergency funds.* Years ago, a HELOC saved our home by providing cash to make 1st DOT house payments while we were out of work for an extended period, and depleted our savings.* To a great degree, this is a "can I sleep at night" decision as much as a pure financial analysis.

One caveat ... if we had a very serious economic storm, I would expect all HELOC's to come under great scrutiny.* If a HELOC is a critical part of your emergency plan, use your good judgment whether you should draw it all down quickly if serious storm clouds were to gather.* I consider all of my credit lines to be emergency funds, but recognize they could be cut off in an all out disaster.

One last thought ... depending upon your current 1st DOT rate, you might consider refinancing all of the home debt. We recently took a 5.625% Quicken Loans 30-year fixed, interest-only first 10 years, then 20 year amortization deal. Slipped it in under an existing HELOC, amortizing it aggressively to retire in 5 or 6 years, but if economic conditions deteriorate, we have our emergency funds, HELOC, and we can back off to interest only if necessary. Thru hard lessons, we try to hedge everything.

Best of luck.
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Re: HELOC question
Old 10-09-2005, 04:50 AM   #9
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Re: HELOC question

Quote:
Originally Posted by Charles
* I consider all of my credit lines to be emergency funds, but recognize they could be cut off in an all out disaster.
True! Along with everything else. NO was just the most recent example
of how quickly day to day life can be turned upside down. Anyone
who thinks the "government" will "do better" next time is dreaming.

Plan for the worst and hope for the best.

JG
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Re: HELOC question
Old 10-09-2005, 10:39 AM   #10
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Re: HELOC question

Thanks for all of the advice, I needed the sounding board.

Wab and Charles, I think that's the right plan, my balance is 34.5k but the line of credit is 50k, so I would be eliminating an emergency source of cash going fixed amortized. If the forecast is to have variables float up to 7% and hang around there I think we'll just pay it down with the Emigrant money and try to get agressive like astromeria mentioned. We are kind of up in the air right now on income. I did get a nice raise, but now DW thinks she'd like to stay home. Our daughter has special needs and we are passing up some services she could recieve just because we don't have the time.

So we'll wipe out the money market, pay down the loan by 15k now, and stick ~$500/month on it until March, when DW gets her 2005 work bonus, then see if she wants to stay home.

WRT serious economic storm, I'm an optimist, and if things ever got that bad, well, I figure I'll have bigger things to worry about!
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