Home Equity Line of Credit


I

Igor Chudov

At the moment, the only debt that our family has, aside from credit
cards that we pay off in full every month, is the house. We owe about
40% on it and pay appx. 12% of our gross as mortgage.

However, I have a concern that if we lose jobs, or some such, that it
would be good to have some extra liquidity.

So, from a while ago I remember that people were taking HELOC, or
credit lines, using their homes as collateral.

So I essentially have these questions:

1) Can I take a HELOC and not use it for a couple of years
2) Does it cost anything to maintains a HELOC?
3) Do the banks have any weaseling clauses in the contract that would
let them cancel this credit line in the event we lose our jobs?

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J

JoeTaxpayer

Igor said:
So I essentially have these questions:

1) Can I take a HELOC and not use it for a couple of years
2) Does it cost anything to maintains a HELOC?
3) Do the banks have any weaseling clauses in the contract that would
let them cancel this credit line in the event we lose our jobs?
I can speak to the rules for mine;
1) I needed to draw $50,000 at signing. I paid it back 2 days later, so
a few dollars interest.
2) First year was free, $50/yr after.
3) It can. I sifted through every word of mine and the contract states
they can freeze based on Loan to value. My 1st mortgage is less than 25%
of home's value, so it would take a drop of more than half to still be
at 50% LTV, I don't see that happening. No reference in contract to
income. 10 year draw, then 20 yr payback.
Joe
 
C

Chip

Igor said:
1) Can I take a HELOC and not use it for a couple of years
2) Does it cost anything to maintains a HELOC?
3) Do the banks have any weaseling clauses in the contract that would
let them cancel this credit line in the event we lose our jobs?
Don't know about your particular bank, but I took out a large HELOC
about 2 years ago to use as a bridge loan for a new house. Decided not
to move, but kept the HELOC just in case. Didn't touch it ($0 cost)
until last month when I used it to pay cash for a new car. It's
interest rate was 3.5% lower than a new car loan. Easy, peasy.

Chip
 
E

Elizabeth Richardson

Don't know about your particular bank, but I took out a large HELOC about
2 years ago to use as a bridge loan for a new house. Decided not to move,
but kept the HELOC just in case. Didn't touch it ($0 cost) until last
month when I used it to pay cash for a new car. It's interest rate was
3.5% lower than a new car loan. Easy, peasy.
Chip, first thanks for helping to stimulate the economy by purchasing a new
car. However, we have talked time and time again here that borrowing against
your house for a depreciating asset such as a car is a very bad idea. And
don't think that I don't understand the difference in interest rates,
because I do. We have also advised against borrowing for car purchases.
Frankly, it is all this borrowing that has gotten us into the economic
difficulty we now find ourselves.

Elizabeth Richardson
 
D

Douglas Johnson

Elizabeth Richardson said:
Chip, first thanks for helping to stimulate the economy by purchasing a new
car. However, we have talked time and time again here that borrowing against
your house for a depreciating asset such as a car is a very bad idea.
Isn't there some mental accounting going on here? Borrowing is borrowing. From
a pure net worth point of view, it doesn't matter what he uses to secure the
loan. The car is depreciating anyway.

I know that borrowing against your house potentially puts your house at risk,
but it sounds like he is getting well paid for assuming that risk. Assuming, of
course, that his cash flow and net worth are in good shape.

I do agree with you that, if you can't pay cash for a new car, you should buy
used. A rule I have violated several times.

-- Doug
 
C

Chip

Elizabeth said:
Chip, first thanks for helping to stimulate the economy by purchasing a new
car. However, we have talked time and time again here that borrowing against
your house for a depreciating asset such as a car is a very bad idea. And
don't think that I don't understand the difference in interest rates,
because I do. We have also advised against borrowing for car purchases.
Frankly, it is all this borrowing that has gotten us into the economic
difficulty we now find ourselves.

Elizabeth Richardson
And my house is not a depreciating asset? Checked home values and
foreclosure rates in the Phoenix area recently?

I thank you for your good advice and in normal times I try to live by
them. But these are not close to normal times. I needed a car, checked
all other avenues of finance, including straight cash (which I have
available) and decided that for my circumstances and my wife's peace of
mind to go this way.

Not to get political, but I totally disagree that borrowing got us into
this mess. It was greed, fraudulent in some cases, and lack of
competent or any oversight that did it.

Chip

Chip
 
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T

Tad Borek

Douglas said:
Isn't there some mental accounting going on here? Borrowing is borrowing. From
a pure net worth point of view, it doesn't matter what he uses to secure the
loan. The car is depreciating anyway.
I'd propose that the MIFP "best practice" be paying for your cars in
cash, irrespective of whether you choose to buy used or new.

Doing so reinforces the point that a car is consumption, just like a
computer, clothing, travel, or a 50" TV - which also drop in value
starting from the minute you leave the store, and eventually are worth
$0 or close to it. I think most would agree that you should pay for
those things in cash, even if you can borrow the money at 2% on a home
equity line of credit. So why not a car?

Like any rule there are exceptions, of course, but "I can get
0%/low-cost financing" is one to consider very carefully. The benefit of
paying in cash is as much behavior-related as financial. I'd bet that
80%+ of people buying a car with cheap financing end up with a more
expensive car than if they had to pay in cash. The cash buyer is much
more likely to conclude "it isn't affordable" or "I want to spend my
money on something else." Which is part of the reason dealers offer
0%/low-cost financing.

-Tad
 
E

Elizabeth Richardson

Chip said:
Elizabeth Richardson wrote:

Not to get political, but I totally disagree that borrowing got us into
this mess. It was greed, fraudulent in some cases, and lack of competent
or any oversight that did it.
We have discussed this before, too. Borrowing is just one of the things that
got us into this mess, in addition to the reasons you state, plus some
others. No argument from me there is plenty of blame to go around. There
likely wouldn't be so many foreclosures now if people hadn't borrowed too
much, whether it be for their houses, for their cars, or for other
consumption via credit cards. Too much borrowing is definitely part of it,
and our future economic woes will be further compounded by government
borrowing.

Elizabeth Richardson
 
B

BreadWithSpam

Igor Chudov said:
1) Can I take a HELOC and not use it for a couple of years
Absolutely. If you qualify. (which it appears you would
be likely to do).
2) Does it cost anything to maintains a HELOC?
Some have a small annual fee. Some don't. If your credit
is good, you should be able to find one with no annual fee
and with a rate that's below prime (ie. prime - 0.50).
3) Do the banks have any weaseling clauses in the contract that would
let them cancel this credit line in the event we lose our jobs?
Nothing "weaseling" about it. If your credit deteriorates,
they will freeze your line. Every one of them. Is there
a reason they shouldn't reserve that right in their contract?
It's not a fixed loan. It's a line of credit.

That said, your employer doesn't notify them that you've
lost your job. They are generally going to monitor your
credit report and FICO scores, but they are not going to
call your boss and check that you're still there.

You're more likely to have your credit line frozen if,
say, you start running up big credit card bills.

Several of us here have been saying - for years and well
before the current credit crunch - that a HELOC is NOT an
emergency fund, nor is it a substitute for one.
 
H

honda.lioness

Tad Borek wrote
Like any rule there are exceptions, of course, but "I can get
0%/low-cost financing" is one to consider very carefully. The benefit of
paying in cash is as much behavior-related as financial. I'd bet that
80%+ of people buying a car with cheap financing end up with a more
expensive car than if they had to pay in cash. The cash buyer is much
more likely to conclude "it isn't affordable" or "I want to spend my
money on something else." Which is part of the reason dealers offer
0%/low-cost financing.
The above is my nominee for "Post of the Month."

The rule above surely also applies to those who seek no-down-payment
home mortgages.
 
C

Chris Cowles

Several of us here have been saying - for years and well
before the current credit crunch - that a HELOC is NOT an
emergency fund, nor is it a substitute for one.
I could be, in an emergency. <smile>
 
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C

Chip

I could be, in an emergency. <smile>
Chris Cowles
Gainesville, FL

Hey, my old stomping grounds, graduated from UF in 68. Go Gators!
To keep it on topic, how's the economy and health insurance doing in Fl?
Chip
 
C

Chris Cowles

Chip said:
Chris Cowles
Gainesville, FL

Hey, my old stomping grounds, graduated from UF in 68. Go Gators!
To keep it on topic, how's the economy and health insurance doing in
Fl?
My previous comment was meant to be "It could be...", not "I could
be...".

On topic, UF has had some personnel layoff and is considering paring
some undergraduate degrees. Construction projects are on hold, if not
already contracted. They're holding the freshman class to a previous
enrollment level. In general, we're affected here just as other places
are but we don't have much production-type industry so not affected in
that way.

Other signs:

The neighborhood next door to mine cleared a new area for building new
single family homes. They started installation of underground utilities,
but simply stopped. There's a new gravel access road as a result, and no
activity for several months.

Several huge developments across University Ave from UF are simply dead.
One was the corner of 13th and University, probably the most prime
retail spot in the city. Several square blocks were leveled. Now it's a
grass parking lot. Another is a high-rise (by Gainesville standards)
that takes up half a square block across the street from the UF library.
They build the concrete framework and now there's nothing but
construction barricades blocking the sidewalk.

The guys who rented space in the downtown parking garage and detailed
cars there are now gone. That's simply anecdotal but illustrates how the
economy is affecting small businesses.

A new shopping center that opened before the collapse is doing okay, but
they stole some tenants from the Publix shopping center across the
street. Those spaces are still vacant, which is unusual in that
location. It's a high-income area with limited retail space, so
competition was high (as was rent) for the available space. No longer
true.
 
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C

Chip

Chris said:
On topic, UF has had some personnel layoff and is considering paring
some undergraduate degrees. Construction projects are on hold, if not
already contracted. They're holding the freshman class to a previous
enrollment level. In general, we're affected here just as other places
are but we don't have much production-type industry so not affected in
that way.
But doesn't UF crank out about 5000 grads/yr? If that isn't production
what is.

I had thought of retiring back to Gainesville. How is the area for
retirees now?

Chip
 

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