No Cost HELOC??

[Golden sunsets]

I'll apologize in advance for asking a dumb question and for seeming ill informed.

The Situation: DH and I(75 &72) are planning, to move from our current paid for home to a different home, yet to be identified, that accommodates our need for a 1st floor master. We've identified a likely neighborhood, which is lovely and as a bonus, all yardwork (mowing, landscaping, irrigation and plowing) is taken care of by the HOA. The new home will not be smaller and cost more than our our current home is worth by a factor of $150K -$250K.

Because of the housing market, which is crazy in our area, we will need to make an all cash offer to stand any chance of nailing the deal. Even though our own house is ready to put on the market and will sell quickly, we can't list it before we find our next home, as homes in that neighborhood only come on the market rarely.

Soooo, the question is how to bridge buying the next home once we find it. before selling ours. We have cash that would cover roughly 55% of the cost of the new home. We have one asset in our taxable brokerage that doesn't have much of a capital gain that would cover about 16% of the cost and we have CD's that would cover the remainder but those CD's yield 3% and we'd hate to terminate those CD'S early. The rest of our taxable brokerage has huge LTCG's, which we'd prefer not to sell for tax reasons. Once our current house sells of course we'd replenish everything, except the portion of our current cash representing the higher cost.

So we've thought of a HELOC, but we have questions we hope you folks can answer.

1) As a threshold question can a HELOC be used to buy a different home?

2) On another thread on this site a poster referenced a no cost HELOC. I presume the no cost referred to no up front costs to establish the line of credit and no cost until draw down? Am I correct and if so how do I apply for this type of HELOC. I thought I'd check this out on line but was immediately deluged with constant phone calls and I didn't want to answer my phone it was so constant. Think 5 phone calls per hour.

Or would it be better to take out a margin loan against our very large taxable brokerage account?

We have no lack of assets but aren't sure how to navigate this.

PS. It doesn't make sense to me to apply for a mortgage loan for the new home even though I'm sure we'd qualify as we need our offer to be all cash.

Thanks in advance for your help [emoji4]

 

[OldShooter]

We are in pretty much the same situation, building (and making progress payments on) a second lake home but needing to keep occupancy of our current lake home until we can move. When we sell it we'll pay off the swing loan.

I think most HELOCs are resold by the originator and involve fees. We just did a no-fee HELOC for our swing loan but it was with a large bank where we had a three-decade business and personal relationship. Doing it was a pain, though because of the documentation they demanded. It took a month or more. Rate is 30bps over prime. Ask your bank.

Schwab and probably other brokers offer loans secured by assets in taxable accounts. Probably your brokerage house has something similar. Talk to your broker. IIRC the IRS regs don't allow pledging an IRA. It's considered to be a distribution and taxable.

Absent any nelp from your current bank or broker, maybe talk to a smaller bank or credit union in the area of the house purchase. They might be interested in gaining a high net worth customer and hence be a little flexible.

 

[Splash]

We took out a HELOC on our primary residence a little over a year ago at a regional bank and paid no fees. However, we pay a $50 maintenance fee per year regardless if we draw funds on it or not. I'm under the impression that this is pretty typical.

We told the bank that our plan was to use the money to purchase a new cottage when we found one we wanted. We didn't want to sell our existing cottage until we found a new one and we didn't want to trigger capital gains by selling investments only to repurchase them once the existing cottage sold. The bank told us that we could use the HELOC funds for whatever we wanted. The only stipulation was that we would need to repay any loaned amounts at the time the primary residence (collateral property) was sold.

 

[jazz4cash]

I had pretty good experience with Third Federal Savings and Loan. No cost HELOC. I think there was a minimum draw required. HELOCs are usually variable (index + margin) with caps on changes and may adjust annually or monthly. Third Federal is usually prime MINUS the margin and it adjusts whenever the prime changes. They charge $65/ yr maintenance fee but it was waived in 1st year. They also typically give $100 Home Depot gift card, I think.

I think the margin loan is a good idea but I’m thinking HELOC has better rates.

 

[RetiredHappy]

I have done it both ways - take a HELOC on an existing home and a LMA (Loan Management Account) against my taxable brokerage account - it is not a margin loan. Both cost me nothing until I draw on them, and interest rates are variable.

 

[Souschef]

I used the money from my HELOC to buy our new home.

 

[JDARNELL]

I used a heloc years ago to purchase a home. I went with a private state bank as I knew I was gonna pay if off in 180 days. The loan officer said he had never seen a loan that high on a heloc variable. He was so proud of himself for coming in on his day off to do me a favor to be at the closing. I lost my religion when he spurted that out and reminded him that it was his job and they were making money off the transaction. I was hell bent on getting rid of that loan as soon as I can. 33 days later I walked in and paid it off.

Some no cost heloc will require you to pay back the closing cost if the line is closed within the first 3 years. So just factor that into your equation if you go that route. I know PenFed is doing that now.

In my market cash offers are making the difference between a winning bid or not being selected. I'll give you two examples. In February I purchased a place in an area which had not had a sale in 2 yrs due to no one wanted to sell. I came in 3% under asking price cash and the seller took my offer in spite of him having offers that were 5% over asking but were financed. Last week I put in a full price cash offer on a property with a less than 30 day close and the seller took the offer over multiple offers that again were financed.

If its a place you truly want, have a good understanding of the value in the area on a sq ft basis and income approach do what you have to do to get what you want. Cash is King as sellers eyes get real big when they see it even in this hot housing market.

 

[ERD50]

...

Or would it be better to take out a margin loan against our very large taxable brokerage account?

We have no lack of assets but aren't sure how to navigate this. ...

This spring, I made a cash offer on this home, using a Line of Credit from our taxable account (at E-trade), and got it at ~ 2.8%.

-ERD50

 

[Marita40]

I got a no cost HELOC from Alliant last fall just before I retired. Haven’t used it yet but the online application process was simple and clear.

 

[SoReady]

I anticipate being in a similar situation next year.

Another idea presented to me was to use our IRA money. I objected due to taxes incurred. The response is you can return it to the IRA without incurring taxes within 60 days. I then objected because of the risk the house might not sell in 60 days. Which my advisor said to take my wife’s ira and pay back my ira with that money within the 60 day requirement. This would give us another 60 days. This can buy you 120 days to get the house sold. All this is predicted on having enough ira funds in yours and your wife’s accounts to cover what you need.

 

[Golden sunsets]

This spring, I made a cash offer on this home, using a Line of Credit from our taxable account (at E-trade), and got it at ~ 2.8%.



-ERD50

Interesting ERD50. Did you arrange for the LOC before you made the offer? How long was the LOC good for? I'm thinking of establishing the borrowing capacity now, knowing that the right house might not come on the market until next spring or later. Would that scenario have worked for you?

 

[Golden sunsets]

I got a no cost HELOC from Alliant last fall just before I retired. Haven’t used it yet but the online application process was simple and clear.

What is the interest rate or is it variable, depending on rates when you draw down?

Did the HELOC require an appraisal?

What is the max that Alluant will allow you to borrow vs home value?

 

[Golden sunsets]

I anticipate being in a similar situation next year.

Another idea presented to me was to use our IRA money. I objected due to taxes incurred. The response is you can return it to the IRA without incurring taxes within 60 days. I then objected because of the risk the house might not sell in 60 days. Which my advisor said to take my wife’s ira and pay back my ira with that money within the 60 day requirement. This would give us another 60 days. This can buy you 120 days to get the house sold. All this is predicted on having enough ira funds in yours and your wife’s accounts to cover what you need.

Interesting. I would not have thought of that. What is the interest rate you'd pay?

 

[Golden sunsets]

JDARNELL;

"Some no cost heloc will require you to pay back the closing cost if the line is closed within the first 3 years. So just factor that into your equation if you go that route. I know PenFed is doing that now."

HMMMM. The closing costs of the HELOC. What are the closing costs?, or how are they determined?

 

[Golden sunsets]

This spring, I made a cash offer on this home, using a Line of Credit from our taxable account (at E-trade), and got it at ~ 2.8%.



-ERD50

ERD50; What percentage of your taxable will the brokerage allow you to borrow?

 

[JDARNELL]

JDARNELL;

"Some no cost heloc will require you to pay back the closing cost if the line is closed within the first 3 years. So just factor that into your equation if you go that route. I know PenFed is doing that now."

HMMMM. The closing costs of the HELOC. What are the closing costs?, or how are they determined?

Good question. The bank incurs some cost to issue these and that is what they are trying to recoup. I don't know the specifics but I would suspect recording fees, appraisal (if needed), etc

 

[Golden sunsets]

We are in pretty much the same situation, building (and making progress payments on) a second lake home but needing to keep occupancy of our current lake home until we can move. When we sell it we'll pay off the swing loan.

I think most HELOCs are resold by the originator and involve fees. We just did a no-fee HELOC for our swing loan but it was with a large bank where we had a three-decade business and personal relationship. Doing it was a pain, though because of the documentation they demanded. It took a month or more. Rate is 30bps over prime. Ask your bank.

Schwab and probably other brokers offer loans secured by assets in taxable accounts. Probably your brokerage house has something similar. Talk to your broker. IIRC the IRS regs don't allow pledging an IRA. It's considered to be a distribution and taxable.

Absent any nelp from your current bank or broker, maybe talk to a smaller bank or credit union in the area of the house purchase. They might be interested in gaining a high net worth customer and hence be a little flexible.

Thanks Oldshooter. Good actionable items.

 

[SoReady]

Interesting. I would not have thought of that. What is the interest rate you'd pay?

There is no interest rate. It is essentially withdrawing your ira money. If you don’t return it to the ira you pay the taxes on it.

 

[euro]

I'll apologize in advance for asking a dumb question and for seeming ill informed.

So we've thought of a HELOC, but we have questions we hope you folks can answer.

1) As a threshold question can a HELOC be used to buy a different home?

2) On another thread on this site a poster referenced a no cost HELOC. I presume the no cost referred to no up front costs to establish the line of credit and no cost until draw

Or would it be better to take out a margin loan against our very large taxable brokerage account?
[emoji4]

HELOC is an ideal product for this type of situation. A margin credit line will work too but is usually much moe expensive (higher rate) unless it is well into the 7 figures.
Any local bank will do a HELOC for you and most will not have significant fees (don’t worry about 50 bucks here or there - given the size of the transaction, 50 bucks is irrelevant). With a local bank, chances are that they will do the deal with no, or a limited drive-by appraisal

 

[Marita40]

Goldensunsets, since the Alliant HELOC I opened was last year, you should do your own research on this since terms may have changed.

 

[HawkeyeNFO]

HMMMM. The closing costs of the HELOC. What are the closing costs?, or how are they determined?

I got a HELOC about a year ago from a CU in MD. No appraisal costs or closing costs were incurred, unless I paid the HELOC off within 2 years, and in the paperwork that I signed, that cost was explicitly spelled out. About $800 IIRC.

So I have paid it down to the point where there is a just little bit left (less than $30k) on the HELOC, and will make the minimum payments until the 2-year period is over. Interest rate is only 2.49%.

 

[SoReady]

Interesting. I would not have thought of that. What is the interest rate you'd pay?

I never would have thought of either. Pretty creative. There is no interest to pay. It is essentially an ira withdrawal and you would pay taxes on it if you don’t put it back within 60 days.

 

[Magus]

Third Federal is great for HELOC from cost - if $100k+ its no fee the first year and 2.24% interest currently (prime - 1.01%) but they are very behind. I'm working on closing on one now and its been 2 months with no date scheduled. They also have terrific rates in general. Third Fed also has a very cheap refi as well at 2.29% on a 5 year smart arm* for ~$250 total closing cost as another option instead of a HELOC.

*Smart ARM - at any point you can call them and lock in for 5 more years at going rates for $279

 

[OldShooter]

Thanks Oldshooter. Good actionable items.

Glad to help. Happy coincidence that I trod the OP's path a few months ago. More thoughts:

I did not shop interest rates at all, valuing convenience over saving a few bucks over the short time we'll need the money. Others, less lazy, could probably have beat what I got for a rate. Had the bank added annual maintenance fees or other little gouges I would have been out of there on general principles. I have none of that.

Re paying costs if the line is closed: Easy. Don't close it. The line I got was actually a replacement for an old line that was at a higher interest rate. I'm sure that line sat open and unused for 10 years at least. Again, no annual fees is the key. Funny: The line backed a checking account that I never used either. Every month they posted a $10 charge, then posted a reversal because we are senior citizens. So good news there too and another little fee to keep an eye on.

Re the IRA game I did not mention that because to me it is a little like juggling with hand grenades. Makes perfect sense for the fastidious, though. I have a small business mentee who plays the analogous game with credit cards, kiting balances based on points offers and zero interest offers. Makes my hair curl but she is an accountant by trade and "fastidious" fits her well. She and DH do quite a bit of traveling on the points she gets.

 

[Golden sunsets]

I guess the fee if the HELOC is paid off before x years is what makes it profitable for the lending institution? I was thinking that it wouldn't seem like a very desirable loan if the lender knows that you will pay it off very quickly, as we would intend to do.

So generally speaking - no appraisal anticipated?

Anyone know what the borrowing % (Loan to Value) might be for a no appraisal HELOC?