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.

[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.

[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).

[Hog's Gone Fishin]

Great advice in here. DEFINITELY go with a Line of Credit(HELOC) instead of a fixed loan. One point I didn't see mentioned is that with a HELOC you are only obligated to pay the interest each month but are allowed to pay as much as you desire on the principal.
I keep a Line of credit against one of my rental properties available so I always have funds available. I just have to renew it yearly but doesn't require any appraisal. I personally won't borrow money against my Home residence. I got it paid off last year and now nobody can take it away if for some reason I was to lose everything else.

[Swanman]

Just throwing poop at the wall, but another option, if you have a 401k with a large enough balance, is to take out a loan against your 401k. I think you can do up to $50k and if its for home improvement, it can be paid over a 10 year period. The interest rate is higher but you are paying yourself interest. The other nice thing is that there is no credit check so you can get the funds very quickly, assuming you meet the requirements for taking out the loan.

The catch is that if you don't pay it back on time, it is then considered a taxable withdrawal from your 401k and you would have to pay tax and penalties on it, so you need to be pretty sure you could pay it off in the 10 years.

[mikeyis4dcats.]

just check the HELOC rates on our bank site, ouch - 5 to 7%

[mikeyis4dcats.]

Originally Posted by Swanman

Just throwing poop at the wall, but another option, if you have a 401k with a large enough balance, is to take out a loan against your 401k. I think you can do up to $50k and if its for home improvement, it can be paid over a 10 year period. The interest rate is higher but you are paying yourself interest. The other nice thing is that there is no credit check so you can get the funds very quickly, assuming you meet the requirements for taking out the loan.

The catch is that if you don't pay it back on time, it is then considered a taxable withdrawal from your 401k and you would have to pay tax and penalties on it, so you need to be pretty sure you could pay it off in the 10 years.

you also lose the compounding factor on that money.

[Amnorix]

Originally Posted by mikeyis4dcats.

just check the HELOC rates on our bank site, ouch - 5 to 7%

No, seriously, that is TERRIBLE. Hunt around for another bank. You should be able to do better than that.

[Hog's Gone Fishin]

If you manage a HELOC account correctly the interest you pay is WAAAY lower than stated.

It's figured on the Average daily balance so if you dump all income into the loan and resupply your needs from it you don't pay the full interest as with a fixed loan. I utilized this approach to speed up paying off rental properties.

[Rain Man]

Originally Posted by Amnorix

No, seriously, that is TERRIBLE. Hunt around for another bank. You should be able to do better than that.

Yeah, that's kind of shocking. I had mine a decade ago, but I don't think interest rates have changed much, and mine was ludicrously low. It was something like prime+0.25% or prime+0.5%. My rate might have been under 2 percent if I remember right. They were just daring me to use it.

I wonder if something has changed to give them higher rates.

[The Bad Guy]

Thanks everyone. I'm going to shop around locally. Basement needs to get one in the worst way and I need to start this process before the end of the summer.

I think I can get a 3% on a HELOC loan from a local bank, but I'm going to meet with them Monday. Not worried about the additional payment. My mortgage is very manageable and paying off student loans will significantly free me up to handle another 300-400 a month.

[Hog's Gone Fishin]

Originally Posted by The Bad Guy

Thanks everyone. I'm going to shop around locally. Basement needs to get one in the worst way and I need to start this process before the end of the summer.

I think I can get a 3% on a HELOC loan from a local bank, but I'm going to meet with them Monday. Not worried about the additional payment. My mortgage is very manageable and paying off student loans will significantly free me up to handle another 300-400 a month.

Great and just remember your monthly statement should be for interest only and you pay whatever principal you want.

[2bikemike]

Just my 2 cents, but I went another route that I felt suited me more. I have always just refinanced the property for a larger amount than what I owe. I have done it for a complete remodel and for a landscape upgrade. I also did it to get into Rental properties.

My reasoning is that equity in your home is basically funny money it doesn't become real until you take it. The kitchen and the landscape added value to the house. The investment into Rental properties basically arbitraged my money Yeah I was paying interest but the return I got on the investment was slightly more than double what I was paying in Interest.

I am very disciplined with my finances. Every time I refinanced the interest rate was comparable or better than the original. I live in California where housing appreciates incredibly fast. So my advice may not work for everyone.

And for the record I would never take a 401k Loan. Yes you are paying yourself the interest but you are losing investing power.

[lewdog]

Originally Posted by Swanman

Just throwing poop at the wall, but another option, if you have a 401k with a large enough balance, is to take out a loan against your 401k. I think you can do up to $50k and if its for home improvement, it can be paid over a 10 year period. The interest rate is higher but you are paying yourself interest. The other nice thing is that there is no credit check so you can get the funds very quickly, assuming you meet the requirements for taking out the loan.

The catch is that if you don't pay it back on time, it is then considered a taxable withdrawal from your 401k and you would have to pay tax and penalties on it, so you need to be pretty sure you could pay it off in the 10 years.

You come out way behind doing this and it should be considered the last option. You end of having to pay it back, plus lose the compounding interest of your money gaining value that you remove from the account.

OP, based on things I'm seeing, you should be able to secure something below 5% with decent credit.

[MahiMike]

dont put the $ into your own home. buy a rental.

[MahiMike]

Originally Posted by Swanman

Just throwing poop at the wall, but another option, if you have a 401k with a large enough balance, is to take out a loan against your 401k. I think you can do up to $50k and if its for home improvement, it can be paid over a 10 year period. The interest rate is higher but you are paying yourself interest. The other nice thing is that there is no credit check so you can get the funds very quickly, assuming you meet the requirements for taking out the loan.

The catch is that if you don't pay it back on time, it is then considered a taxable withdrawal from your 401k and you would have to pay tax and penalties on it, so you need to be pretty sure you could pay it off in the 10 years.

Horrible idea.