HELOC as a way to get emergency cash

[ut2sua]

I was debating whether to pay off/down my mortgage using my current cash holding which yields close to nothing. One thought was to open a HELOC to use as a source of readily available cash in case there is a need after I have used up my cash in paying off the mortgage. I was wondering a few things about a HELOC: how long would the line of credit remain open if I don't actually borrow from it? Can the interest rate change? Given the current low interest rate, it is hard to believe banks will keep interest rate unchanged xx years from now. I used to have a HELOC opened some time ago, but I didn't actually make used of it, so I knew the bank charges a yearly fee (which is fair IMO). Then I came across the below article
https://www.theglobeandmail.com/inv...es-banks-can-take-your-heloc-safety-net-away/
The short summary is: a bank can modify the terms of a HELOC to fit its need. I am not an expert in this area, but the article provided answers to some of my questions. If interest goes up to, say 10%, 10 years from now, it seems reasonable that a bank will not honor a current HELOC rate of ~3% (?) Should folks with a HELOC opened to be used as a source of emergency cash be aware of these facts? Please add any comments to educate the rest of us. Thanks in advance.

 

[Andre1969]

I had an HELOC. It was variable rate, tied to the Prime Rate. I could adjust every month. I first opened it in early 2005, the first month, the interest rate was 5.5%. It went up soon after, and by late 2006 was up to 8.5%. It stayed there for most of 2007, but dropped a bit at the end of the year.

It ended up at 3.5% for February 2009, and there it remained until the end of the 10 year draw period, which was February 2015. Then the real fun started.

The bank was a bit vague about what would happen at the end of the draw period, and stupid me, I didn't read the fine print like I should have. Or hell, maybe they even modified it. I remember them saying that after the draw period, it might go to a regular mortgage, but if I was in good standing they might just leave it open as an HELOC.

Well, they turned it into a fixed-rate mortgage. 4.99%, 10 years. It wasn't an overly hideous rate at the time, but that 10 year term made the payment high.

Also, one little warning. During the Great Recession, a lot of mortgage companies were freezing HELOCs. So, you could have a credit limit of, say, $100K, but only have a $30K balance, in theory leaving you $70K more to draw out if needed. But, nope...when they started freezing, you couldn't get to that $70K. Plus, if you paid it down, you wouldn't have access to that, either, so it really made sense to only pay the interest, if you thought you might need cash in the near future.

My HELOC had a $50 annual maintenance fee, whether it had a balance or not.

 

[jazz4cash]

The article is about HELOCs in Canada which I am not familiar with. Somehow I seriously doubt "a bank can modify the terms of a HELOC to fit its need". I do believe a bank can invoke various features that are included in the agreement which include calling the loan or freezing the line.

I've seen many lenders that require an initial "draw" to establish the HELOC.
HELOCs are almost always adjustable rate loans. Pay attention to the Index , Margin and Caps that determine how the rate adjusts. For example, my current HELOC uses the Prime rate (Index), -.75 (Margin), and 2% cap. My rate can adjust monthly whenever the prime rate changes with a maximum change of 2% per year. Sometimes there is a Max rate and a floor also. The floor is typically the initial rate.

My loan amortizes over 20 years but it has a 10 year "draw" period for me to take loans against the line. After 10 years I can no longer take additional draws while the loan is in the repayment period. In reality the loans are so easy and inexpensive to acquire they probably get paid off early or replaced by a new loan or line of credit.

I agree with comments above wrt freezing the HELOC. A dire economic situation will encourage banks to cancel or freeze lines of credit. That's why many big companies drew down their credit lines when the pandemic hit.

 

[cyber888]

Rather than refi my mortgage, I got a first-lien HELOC last month. So, no more mortgage, just a HELOC. I have the cash to pay off my mortgage, but wanted to keep a big cash emergency fund. Since cash deposits are paying 0.0065% in my online bank, I just paid a big chunk of my mortgage and eliminate paying 3% interest on a mortgage.

But the beauty of HELOC is that I can take back my cash anytime I want for the next 10 years, and just issue a HELOC check to myself. My HELOC has a 10 year draw period, so I can withdraw money from it in the next 10 years, then if you have a balance - it will turn into a regular 30 year mortgage.

My HELOC is -0.26% below prime rate (so 2.99%) - the HELOC contract is tied to Prime Rate, so it cannot be adjusted by my bank as they please. If prime rate stays the same for 3 - 5 years, then I will continue to pay 2.99%. There's zero closing cost. I could pay my balance in 3 years and still access up to $130K. Feds already said prime rate will stay the same until end of 2023 for sure and even beyond. While many refi rates are 3.25%, with closing cost, the true APR rate is around 3.47%. So a 2.99% HELOC tied to Prime rate is great.

My first lien HELOC is only about 30% the value of my home, so the chances of it being frozen is very very low. They only froze 2nd-lien HELOC in 2009 because the value of homes were underwater. That won't happen if your HELOC is only 30% - 40% of your home's conservative value. Banks also feel at ease if your HELOC is first-lien and won't freeze it, because they have first priority to it during foreclosure. if it is second-lien, they don't get priority in foreclosures.

 

[Montecfo]

A standby HELOC is a good idea. Rates are variable, yes they can pull it if you don't use it. Lots were also pulled when property values declined on the financial crisis.

But still a valuable tool.

 

[jazz4cash]

Because of the possibility of the HELOC being called or frozen in the even of a widespread emergency, it may be too risky to rely solely on it for a source of funds. If you are only looking to protect against a personal emergency it might be ok. For many many years I could not afford to have a traditional emergency fund so I relied on a combination of only 1 months expenses plus credit card lines plus HELOC. We got through but some of that was luck.

 

[Markola]

We long had a $40,000 unsecured line of credit at the bank, which avoids putting our house at risk. So far in life, we’ve never had any such emergency, though it’s been useful for cash flow management during moves and renovations.

 

[Octogirl]

We have a HELOC for emergency cash, opened in 2018 (before I retired), using $$ when we want to delay selling an asset. Our HELOC is tied to Prime Rate, with current rate at 2.5%.

 

[Montecfo]

We long had a $40,000 unsecured line of credit at the bank, which avoids putting our house at risk. So far in life, we’ve never had any such emergency, though it’s been useful for cash flow management during moves and renovations.

You make an interesting point. The interest on a new loan secured by your existing home is also no longer presumed to be tax deductible, raising the cost of funds. But probably the HELOC would be at a lower rate.

Both loan types could be valuable tools.

 

[sdtech]

We have a HELOC that we use for short term borrowing to pay for large purchases, like a car or new roof, and then sell stock after we know the final costs to repay the HELOC. The terms are very specific from the bank - length of how long the line is open (6 years) and the interest rate. We have a variable rate (now about 2.25%).

The bank charges nothing for the line if it's not used. If rates were to dramatically move upward I wouldn't use it.

It's turned out to be a useful and low cost tool for the way we use it.

 

[ut2sua]

OP here. I actually forgot (or maybe was never aware) that HELOC makes used of adjustable rate even though I did open (then closed) a HELOC account several years ago. All comments were very helpful, and I got answers to all my questions and more. Many thanks to all posters for your knowledgable comments.

 

[CoolRich59]

My HELOC had a $50 annual maintenance fee, whether it had a balance or not.

Same with us. A friend recommended a HELOC as a good "rainy day" kind of thing. I set it up and never gave it a second thought. A year later I get a strange $50 charge on my bank statement. It took some time to figure out that it was the maintenance fee. I closed the HELOC the next day.

 

[Marita40]

I'm retiring in December and, as I posted elsewhere, just secured a no-cost, no annual fee HELOC from Alliant. It was an easy process.

 

[CoolRich59]

I'm retiring in December and, as I posted elsewhere, just secured a no-cost, no annual fee HELOC from Alliant. It was an easy process.

Going to look into this. Thanks for the heads up.

I like the idea of a HELOC as a back-up, but balk at paying for the privilege, even if it is only $50 (guess I'm just a cheap skate )

 

[Sunset]

I had a no cost heloc (still have it), but used it years ago to cover some expenses, and paid it off a year later.

Then another time I borrowed big against it to buy another place, and when mortgage rates were favorable and I could see I'd be paying off over years, I converted it to a regular mortgage, so the interest rate was predictable.

 

[Starsky]

I'd be certain to make sure you can get the HELOC you want at the rate you want before making any moves. Banks may have low rates, but they have tightened up lending substantially to minimize default risk and it may be more difficult to secure a loan than you expect.

 

[Duke of Sands]

Am thinking of getting a HELOC as well, wondering who folks have gone with, e.g. I noted Alliant as a good one with no fees. Any others?

 

[cyber888]

Am thinking of getting a HELOC as well, wondering who folks have gone with, e.g. I noted Alliant as a good one with no fees. Any others?

Got mine from Third Federal - 2.99% today (tied to prime rate) and no closing. Got a $100 Home depot gift card at closing. Its' good

 

[jazz4cash]

I have Third Federal as well for a few years now. I’m very satisfied. I think they charge me $65/yr in fees that were waived in year 1.

 

[Duke of Sands]

Thanks, folks. Will look into Third Federal.
Chuck