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Just applied for a HELOC
Old 10-12-2010, 03:51 PM   #1
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Just applied for a HELOC

DW & I have just applied for a HELOC through B of A. I've never done a HELOC before, but I found a checklist online of things to ask about (margin, minimum draw/average balance requirements, etc.), and all the answers seemed favorable, so I went ahead with the application (we're already B of A customers). Still won't know if the application will be accepted for a few days, and will have one more opportunity to walk away if it is. There are no closing costs or other fees to establish the line of credit. I'm posting this just to get a sanity check on what I'm planning to do.

The impetus for this is that DW and I are planning to do some necessary renovations on our house (kitchen mostly), which we've deferred for a few years. We have enough cash on hand to pay for the renovations, but that money is our emergency fund. It's currently earning 1% in a "high-yield" account at EmigrantDirect.

Since mortgage rates are so low, we considered a cash-out refi to pay for the renovations, but that didn't sit well with me for a few reasons: we're 8 years from paying off our current mortgage, and I don't want to extend the timeline any longer than absolutely necessary. Also, the interest rate on our current 15-year loan (4.375) is already pretty good, so the gain from a few tenth's improvement in the rate isn't that significant when closing costs are factored in. It also seems foolish to pay 4% interest to borrow money when we're only earning 1% on our cash on hand. I also think we'll be more likely to adhere to a budget for the renovations if we're using our own cash, rather than spending the banks monopoly money (silly psychological game, perhaps, but there it is).

Some specifics: The LOC is for $100k (about 30% more than our emergency fund). In the ideal scenario, we'll never touch it, and it won't cost us a thing to have it available. We have excellent credit, so it'll be limited to 2 points over prime after the introductory rate expires. We're not the type to tap it for frivolous expenditures. We have about $500K equity in our house.

I know from my research here that some folks have used a HELOC as an emergency fund, so it's certainly not unheard of. I think my biggest concern is that it could be closed due to a change of circumstances (such as job loss, etc., which is probably when we'd most need it).

Any thoughts or things I should consider are appreciated.
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Old 10-12-2010, 08:00 PM   #2
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Prime + 2 sounds high. I bank at B of A and I love my checking account, but I've always thought thier loan rates were too high and thier savings rates too low. Maybe that's not a factor if you don't think you'll draw on the line. Did you compare with any other lenders?
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Old 10-13-2010, 01:28 AM   #3
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I did compare them to my local credit union, and Wells Fargo. As you noted, the rate wasnt my biggest worry. My primary concern was zero cost, with no minimum draw at startup, no annual fees, etc.

Kind of wish I had access to Penfed, but I don't qualify (no military service, etc.).
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Old 10-13-2010, 06:46 AM   #4
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Everyone who joins the NMFA (cost: $20) is eligible to join Pen Fed. However, Pen Fed's HELOC product has a nasty feature: instead of being interest-only for the first 10 years, Pen Fed requires a monthly payment equal to 2% of the outstanding balance. That is a major reason I have my heloc with Schwab instead.
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Old 10-13-2010, 09:32 AM   #5
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I set up a $100K HELOC with my local credit union. The rate changes periodically and I am not sure its the best but there were no costs of any kind to set it up and it is intended for emergencies. Only used it once and paid that off within a year. If you are planning to use it for significant amounts and longer periods then the research into best rates is more important. I joined Penfed via the NMFA but have not used any of their services. My local CU and Wells Fargo pretty much cover my financial needs.
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Old 10-13-2010, 01:17 PM   #6
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Quote:
Originally Posted by brewer12345 View Post
Everyone who joins the NMFA (cost: $20) is eligible to join Pen Fed. However, Pen Fed's HELOC product has a nasty feature: instead of being interest-only for the first 10 years, Pen Fed requires a monthly payment equal to 2% of the outstanding balance. That is a major reason I have my heloc with Schwab instead.
Woah, I didn't know that about NMFA, thanks for the tip! Thanks too for the heads up the about the PenFed HELOC.
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