Home Equity loans

[The Bad Guy]

I'm researching the pros and cons of a home equity loan. We built our house in 2011 and put off finishing the basement and some other small projects because we had several bumps in the road that ended up costing more to finish the house.

We have built up some solid equity in the home and using that line seems to be the best way to go to finishing the basement and paying off a student loan.

I'm seeing around 4.15% at the bank I have my mortgage through.

What are some of the drawbacks that I have no idea about with these types of loans?

Thanks in advance for any guidance.

[Rain Man]

As long as you use them for a specific purpose and pay them off religiously, they're better than getting a regular loan because you can write off the interest. But in my opinion, they should be used for a particular "project" and not on consumer purchases. I used them to do the rehab of my house when I bought it, and I thought that was a good purpose for it. If you get one and buy a bunch of stuff and default, your house gets auctioned off to some other happy family.

As opposed to a home equity loan, though, I'd recommend a HELOC (Home Equity Line of Credit). If you get one of those, you don't have to have an approval process to borrow against it. You just pay it up and down as you need it. Since it's a secured line of credit (using your house as collateral), the interest rates tend to be quite low in addition to being deductible.

[The Bad Guy]

Originally Posted by Rain Man

As long as you use them for a specific purpose and pay them off religiously, they're better than getting a regular loan because you can write off the interest. But in my opinion, they should be used for a particular "project" and not on consumer purchases. I used them to do the rehab of my house when I bought it, and I thought that was a good purpose for it. If you get one and buy a bunch of stuff and default, your house gets auctioned off to some other happy family.

As opposed to a home equity loan, though, I'd recommend a HELOC (Home Equity Line of Credit). If you get one of those, you don't have to have an approval process to borrow against it. You just pay it up and down as you need it. Since it's a secured line of credit (using your house as collateral), the interest rates tend to be quite low in addition to being deductible.

What I'm looking at would add about 300 dollars a month for a 10 year home equity loan. Main purpose is to finish basement which a ballpark cost is going to be around 20k and then pay off the students loans the wife and I currently have which is around another 20k. I'm paying well over 300 right now on those loans so the payment isn't the issue.

I didn't realize there was an approval process though. So with finishing the basement, I will need to have the plans and the estimates before they would give me the money?

[Amnorix]

Originally Posted by The Bad Guy

What I'm looking at would add about 300 dollars a month for a 10 year home equity loan. Main purpose is to finish basement which a ballpark cost is going to be around 20k and then pay off the students loans the wife and I currently have which is around another 20k. I'm paying well over 300 right now on those loans so the payment isn't the issue.

I didn't realize there was an approval process though. So with finishing the basement, I will need to have the plans and the estimates before they would give me the money?

It depends. If they consider it a construction loan, then yes. Which is a total PITA and you shoudl avoid if possible. If you have enough equity in the house to tap another $40K then they shouldn't consider it as a construction loan and you should be able to just take it.

If you go HELOC, as long as you have the equity to tap, they won't care about what you use it for. In fact, many people have the HELOC just "in case" and don't tap it at all. They aren't concerned about what you use it for.

[Bugeater]

Originally Posted by The Bad Guy

What I'm looking at would add about 300 dollars a month for a 10 year home equity loan. Main purpose is to finish basement which a ballpark cost is going to be around 20k and then pay off the students loans the wife and I currently have which is around another 20k. I'm paying well over 300 right now on those loans so the payment isn't the issue.

I didn't realize there was an approval process though. So with finishing the basement, I will need to have the plans and the estimates before they would give me the money?

No, they will just appraise your house to make sure you have the necessary equity to back the loan.

[The Bunk]

Originally Posted by Bugeater

No, they will just appraise your house to make sure you have the necessary equity to back the loan.

They did a drive-by appraisal when I setup my HELOC last year. Was relatively hassle free, and if memory serves, the total fees to set it up were ~$200.

Agree with Rain Man and Amnorix, as long as you are self-disciplined enough to handle it, the HELOC is a great option. You do need to be aware of the potential for the rate to increase though. My introductory rate was around 2%, which goes up to 4% after a year. But it's tied to prime, so if rates start going up, my rate will as well.

[Amnorix]

I agree with Rain Man 100%, but want to re-emphasize the point -- how much self control do you have? A HELOC is great for giving you financial flexibility, and using it to make improvements to your house is terrific! You can also use it to, fo rexample, finance buying a car using a loan that can be deducted on your tax returns and will have a MUCH lower rate than a car loan.

BUT can you make sure you DON"T use it to fund that vacation to Tahiti you always dreamed of? No trips to the f'n casino. No "well, I would've bought a used Prius, but with this line of credit, it's 'cedes or nothing BABY!"

Definitely get the HELOC if you have self-control.

[The Bad Guy]

Originally Posted by Amnorix

I agree with Rain Man 100%, but want to re-emphasize the point -- how much self control do you have? A HELOC is great for giving you financial flexibility, and using it to make improvements to your house is terrific! You can also use it to, fo rexample, finance buying a car using a loan that can be deducted on your tax returns and will have a MUCH lower rate than a car loan.

BUT can you make sure you DON"T use it to fund that vacation to Tahiti you always dreamed of? No trips to the f'n casino. No "well, I would've bought a used Prius, but with this line of credit, it's 'cedes or nothing BABY!"

Definitely get the HELOC if you have self-control.

I'm pretty self controlled. Don't go to the casino, don't gamble on sports, and while we are taking a trip to Disney in October, that's paid for.

[The Franchise]

Definitely go with a HELOC.

[BlackHelicopters]

You will have, in essence, two mortgages . Are you in the financial shape to add another MONTHLY payment into your budget. You are risking your house. Think twice, no three times, before entering into a contract such as this. Only my $.02.

[The Bad Guy]

Originally Posted by theelusiveeightrop

You will have, in essence, two mortgages . Are you in the financial shape to add another MONTHLY payment into your budget. You are risking your house. Think twice, no three times, before entering into a contract such as this. Only my $.02.

Yes, I am. My loan payments are more than the equity line of credit would be so it won't be any strain financially and I'd have a basement for the kids and the loans paid off.

[Amnorix]

Originally Posted by The Bad Guy

Yes, I am. My loan payments are more than the equity line of credit would be so it won't be any strain financially and I'd have a basement for the kids and the loans paid off.

Keep in mind with HELOC:

1. You can pay it down faster if you want, which might not be a bad idea.

2. interest rate will fluctuate. We've been in a low interest-rate environment for so long it's hard to remember, but it's possible that rates climb in the future. Just saying.

[Rain Man]

Originally Posted by Amnorix

Keep in mind with HELOC:

1. You can pay it down faster if you want, which might not be a bad idea.

2. interest rate will fluctuate. We've been in a low interest-rate environment for so long it's hard to remember, but it's possible that rates climb in the future. Just saying.

Point 2 is a really good point. It's been a while since I had one, but when we were doing our rehab project and had a HELOC balance, I would rather nervously watch interest rates. If they go up, your payment goes up and there's nothing you can do about it.

In my case it worked out great because interest rates went down during the course of my payoff. But before putting a bunch of money into a HELOC, figure out what the payments would be if the interest rates went up by 2 or 3 percentage points, just as a worst-case scenario. Be sure you can pay not just the current interest rate, but a higher one.

Actually, Point 1 is a good point as well. I didn't mean to disrespect Point 1 when I made this post. I hope I'm good with Point 1 (fist bump).

[BlackHelicopters]

The interest deduction is the only advantage, but a huge one. When I started my business in 1991, I had a HELOC. HUGE help. Paid off disgusting student loans. A $ 250,000 adventure. The student loan interest deduction was eliminated in 1987 or 1988, just as I was entering graduate school. Sucks.

[seaofred]

Diff. go with the HELOC. Their is still an approval process to get the HELOC (House apraised, etc), but it's much better option as you can write off the interest on your taxes as was said previously.