HELOCs

[omni550]

I'm wondering about HELOCs. I hear about OPs here who have them and was wondering if I should get one "just in case".

My situation: Currently employed. Have reached FI. Possibly RE within 3 months to 3 years (a lot depends on the status of the company where I work). House is worth $260. I have no mortgage nor any other debts.

So, back to HELOCs. Why would you have one? I assume it's for a 'rainy day' situation where you need a chunk of money quickly. The fact that any interest you pay is deductible is a plus. Any other reasons?

If I were to purchase a cottage or winter home, would it be better to use a HELOC instead of a mortgage?

Also, what should I be looking for in a HELOC? What defines a good deal?

Would it be easier for me to get a HELOC before I RE?

Anything else you can think of?

TIA,

omni

 

[brewer12345]

I think most of us have them because you can get instant liquidity cheaply, interest rates are relatively low, banks are willing to lend a LOT on these lines, and they cost nothing to set up. IOW, it is essentially a free option.

If it were me, I would not want a mortgage in retirement. That means neither a mortgage or a HELOC to fund a second home. Buy it for cash or rent.

The best deal I have seen is from Pen Fed. They offer a 90% LTV HELOC at prime minus 1/2% with no setup fees.

 

[REWahoo]

Would it be easier for me to get a HELOC before I RE?

Yes. Lenders always seem to get a little nervous when you write "none" in the "Name of Employer" section of the loan applicaton....

REW

 

[omni550]

Thanks, brewer.

I was just thinking of the possibility of using a HELOC on a 2nd home until I retire (thereby gettting a tax deduction on the interest paid), then paying off the HELOC if I sell my primary house and/or when I RE. Does that make sense?

I belong to Pen Fed, too. At the same time, I noticed that Digital Federal Credit Union (thanks to TH for turning me on to DFCU) offers a HELOC at prime less 1.23%,  80% LTV with no set up fees and no prepayment fees. I think DFCU's might be a better deal, correct?

I'm wondering if the DFCU HELOC is a good deal that I should take advantage of, even if I have no immediate need for it?

I appreciate any insights and input, because HELOCs are a 'mystery' to me and I want to make sure I'm not making a dumb decision.

Thanks,
omni

 

[Andre1969]

I took out an HELOC on my house (no mortgage otherwise) for a few reasons. In no particular order, here they are...

1) The tax write off. Now I know that some people might say it's foolish to spend a buck just so I can get 30 cents back in tax breaks, but having the HELOC does make it worthwhile for me to itemize my taxes, so I can take the tax break for my property taxes, state/local income tax, charitable donations, etc.

2) Having the money easily available to do home repairs and renovations, "rainy day" funds, investing, etc.

3) The mortage company picked up the closing costs for my HELOC. They also didn't require an appraisal.

4) I could control how much or little I borrow, and have some flexibility in paying it back. For the first 10 years, I only have to pay back the interest each month. I've been paying back a bit more, though. For example, the bill just came. Minimum payment is $538, but I'll round it up to $600.

Now, there are some down sides to an HELOC. For one thing, my rate is variable, and can change from month to month. I started off earlier this year at 5.5%, but now I'm at 6.5%, and next month it'll probably be 6.75%. But, I only borrowed $100,000, so it's not ilke it's going to kill me.

Oh, that's another kicker. On an HELOC, you can only write off the interest on the first $100,000 you borrow on your taxes. Anything over $100K, you can't. They approved me for $175K, but I only took out $100K, and have no intention of going over that.

 

[omni550]

Now that I understand a bit more and have examined it more closely, I see that the DFCU 1.23% below prime HELOC charges a $20 inactivity fee if you have less than a $20K balance and there's also a $200 fee if you close it in less than 2 years.

I could see using a HELOC for funding a patio and landscaping project that I'm planning on redoing. That way I can leave my investments  working for me, use my next few paychecks to payoff the HELOC and be able to deduct the interst on my taxes.

PenFed's HELOC looks like it may be the way to go.

omni

 

[Craig]

brewer and andre covered it well ... personally, I think everyone should have them for the reasons noted.  Little or no cost to set up, available for that "rainy day" ... why wouldn't I want a way to tap my equity in an emergency?  And, if it's an "emergency", it's likely also to be a situation where a lender isn't interested in approving a new loan.

If you really want to buy a second home, you're often better off with a mortgage on that property ... less risky for the roof over your head (they'd foreclose on the second house, not your home), usually a lower rate, etc.

Shop for it like anything else ... the money is all green ... you're looking for a lender that will be there, a competitive interest rate, flexibility in use of the line, low or no cost to set up, and LTV.

Now, if we do end up seeing a substantial correction in some residential real estate markets, I'm sure we'll also see HELOC lenders in those areas either shut the lines down, or hopefully reappraise and reset the LTV's.

You might consider looking at www.bankrate.com too ... there is an amazing variety of mortgages / HELOC's out there.

Good luck choosing the right loan.

 

[maddythebeagle]

If it were me, I would not want a mortgage in retirement.  That means neither a mortgage or a HELOC to fund a second home.  Buy it for cash or rent.

Ditto, I agree, but I might consider having one at my disposal just so it is there. Also, if you need a short-term loan, credit cards can be a source of funds.

That is something that I was thinking about? Is it really harder to take out a loan if you dont have a job, but a bunch of investment income?

 

[brewer12345]

Now that I understand a bit more and have examined it more closely, I see that the DFCU 1.23% below prime HELOC charges a $20 inactivity fee if you have less than a $20K balance and there's also a $200 fee if you close it in less than 2 years.

I could see using a HELOC for funding a patio and landscaping project that I'm planning on redoing. That way I can leave my investments  working for me, use my next few paychecks to payoff the HELOC and be able to deduct the interst on my taxes.

PenFed's HELOC looks like it may be the way to go.

omni

I think that's probably reasonable. Just make sure you aren't in too deep. Having lots of assets and lots of leverage is just ducky until the commode hits the windmill. The ridiculously low price of money makes it very tempting.

 

[TromboneAl]

Let's say that someone had, say, $350,000 in non-retirement funds. That is, funds with complete liquidity. In that case, would there be any point in having a HELOC?

 

[grumpy]

That is something that I was thinking about? Is it really harder to take out a loan if you dont have a job, but a bunch of investment income?

I took out a HELOC to use as a bridge loan when I was buying a new house (settled on the new house a week before the old house settled). I had been retired for 4 months at that point. I got the HELOC thru BankofAmerica where I have several accounts. There were no closing costs, no appraisal, and the whole process took about a week.

Grumpy

 

[KB]

I thought long and hard before taking my HELOC out on a house with no mortgage.
But I did a few months before I ERd.

I only took 100,000 on a house worth 550,000. And I don't plan on using it, just wanted it in case.

I have 3 credit cards with no balances and 15,000 each credit limit. I could use them first, but wanted the HELOC in case I buy another house. I'd use that for the down payment until I sold my current house. Wanted to keep my options open.

I wasn't too concerned about the rate since I don't plan on using it. It's through the credit union where I do my main banking.

 

[brewer12345]

Let's say that someone had, say, $350,000 in non-retirement funds.  That is, funds with complete liquidity.  In that case, would there be any point in having a HELOC?

Yeah, I could still make a case for a HELOC. Suppose you need funds now. What is simpler: writing a check on a HELOC or figuring out which thing to sell, considering portfolio characteristics, taxes, etc.?

 

[maddythebeagle]

Yeah, I could still make a case for a HELOC.  Suppose you need funds now.  What is simpler: writing a check on a HELOC or figuring out which thing to sell, considering portfolio characteristics, taxes, etc.?

Yeah, that is what I was thinking also. Some folks will be taking substantial dividend income and rather than selling shares, a short-term loan to bridge would be what I would do.