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Interest Only HELOC - What am I missing?
Old 02-16-2009, 11:37 AM   #1
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Interest Only HELOC - What am I missing?

A lot has been posted on pros/cons/rants/raves about Penfed, but their interest only HELOC just seems too good to pass up, so thought I'd check and see what I'm missing....

We currently have an Equity Loan (6.99%) with PenFed and aside from the obvious recent decline in customer service (a lot to do with their major advertising lately / increase in new members), have been very happy with them.

We were going to refi to their 4.99 rate, when I came across the Interest Only HELOC and cant seem to think of any reason why we should NOT do it:

1) We can pay down the principal each month, even if it's an Interest Only loan without penalties

2) Rates go up each quarter, but even if it the rates double, or if loans freeze, with an Interest Only loan ($250/month minimum), we can afford the increase in payments. Of course the plan will be to quickly lock in a rate with a new Equity Loan (lucky to have enough equity to do both) if the rates don't make sense anymore.

Anything obvious that I'm missing? We are very conservative and don't expect to have a balance unless the rate continues to be better than our other investment options. But...because we are very conservative, we have never done an ARM...

Thanks for the help with the sanity check!
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Old 02-16-2009, 11:42 AM   #2
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Well, the main caveat is, as you said, the rates can change. And if the HELOC rates spike up later, any refi you do with a fixed home equity loan will have a much higher rate, too.

The other caveat is that income streams aren't always rock-solid and reliable. Right now it might seem like that's the case, but if rates spike up at a time you have a major expense and a job loss, all the best laid plans can go up in smoke.

Personally I avoid adjustable-rate debt like the plague. Sometimes they can save you money but I much prefer the certainty of a fixed rate.
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Old 02-16-2009, 12:17 PM   #3
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The PENFED HELOC works exactly as advertised. The rates are adjustable BOTH ways. I initiated mine (wrote the initial check on it last Aug) and the rate, at that time, was 4.5%, in Dec 2008 it went DOWN to 2.75% (that was nice). I am making over 200% of my monthly payment each month (paying it off now would be, for me, stupid). Initial plan was to just use the loan proceeds for a short period of time but, as long a the Fed keeps rates this low, I will just keep paying the interest amount each month (the pay-off funds are sitting in a CD earning 6%). I plan to do that now UNLESS one of two things happen; the end of the 15 year term for the loan OR the rates adjust higher than what I can get from keeping the payoff money in another instrument getting a higher rate. Having, said that the rate is tied to the Prime rate -(currently 3.25%) a YEAR AGO it was 6.5% (loan rate would be 6% at that point).
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Old 02-16-2009, 01:38 PM   #4
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I have the 10 yr 4.99% home equity loan with Pen Fed. I also just added the 2.75% HELOC with them also. I plan to use it to help pay down some other stuff quicker. I chose the interest only version. So I will use this cheap money until the rate climbs above my fixed rate debt.

Tomcat98
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Old 02-16-2009, 08:31 PM   #5
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Quote:
Originally Posted by Tomcat98 View Post
I have the 10 yr 4.99% home equity loan with Pen Fed. I also just added the 2.75% HELOC with them also. I plan to use it to help pay down some other stuff quicker. I chose the interest only version. So I will use this cheap money until the rate climbs above my fixed rate debt.

Tomcat98
Interesting. They were willing to give you two home equity products on the same property at the same time? I assume the fixed loan is a first lien?
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Old 02-16-2009, 09:08 PM   #6
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I used a HELOC during 2001-2006 or so, and again for this recession. easy enough to use. Make sure you have a clear money trail so you can deduct the interest as an investment expense if you borrow more than 100k. That's the hardest part, and the AMT treatment is a little different.
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Old 02-17-2009, 08:28 AM   #7
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Interesting. They were willing to give you two home equity products on the same property at the same time? I assume the fixed loan is a first lien?
Actually I have a first with someone else at 5% that I just redid back to a 30. Its only 30% of house value. 2nd is the 10 yr 4.99% fixed with Pen fed. The new one HELOC is the 3rd I guess at 2.75% currently but is prime - .5%. I origionally called thinking I would replace the 2nd with this but they told me I could keep it and just add the HELOC. I wanted to go ahead and get it open for when I retire but also in the short term I will use their cheap money to pay a couple of things off. Highest rate I have on anything is 5.25%

Tomcat98
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