Home Equity Line Of Credit Good??

JDgreen227 · Jan 16, 2004

The home equity lines of credit are usually a good deal IF you have a budget plan and stick to it. The sad thing is, too many people take advantage of these loans and go out spending and when something goes wrong they are overextended and cannot meet their obligations. We got a 10 year home equity loan at 6.75% to build an addition and that is ALL we used the loan for, no new cars, vacations, etc. After two years we got a HOC line of credit at 5.25% FIXED and still retained the same spending habits, no new cars, vacations, etc. IMO, anyone who obtains a variable rate HELOC when they already need to juggle their bills or have difficulty saving for a retirement nest egg is playing a very dangerous game.

Of course the banks have an interest in writing you a new loan and lending you money, the problem is they are looking out for THEIR interest and not yours. But for a careful person the HELOC is a good deal, especially if you can itemize the interest on form 1040.

DISCLAIMER: I am not an lawyer, a financial consultant, nor a tax professional. Any risk you take should you follow my advice is....well, YOUR RISK, and not mine. Got that? /forums/images/graemlins/grin.gif

BigDave · Jan 16, 2004

First & foremost I'm not a financial advisor & not qualified to give any advise. I guess I should stop here, but of I won't. /forums/images/graemlins/wink.gif

Inflation & prime rate: Inflation has been low for the past few years, but it may come back big time. The world crises & our ballooning budget deficit may have a negative effect on inflation. The dollar has lost a lot of ground to the Yen & Euro. We've lost 30% to the Euro during the past year alone. So, many of those foreign goods that we have become dependant upon will start to become more costly. During inflationary times, the prime rate will need to increase to cover the decreasing value of money. On the other hand, there is some good news on inflation horizon, the Chinese Yuan has been flat compared to the dollar & raises in general are quite small this year, so labor costs are remaining flat. I don't have a crystal ball, just beware the risk of a variable rate loan. If it is accepatble to you - go variable.

Alternative Minimum Tax: If you don't need to worry about this tax, then you don't need to worry about this tax. If you do need to worry about AMT, then interest from HEL's not used improve the dwelling is not tax deductible in the AMT calculation. Funny, you never hear that advertised.

Finally horse sense: If you take out a auto loan to buy a big expensive car, and then are unable to pay the bills due to loss of job or life event, then all you lose is the big expensive car. With a HEL, you can lose your home. It's a risk plenty of people take, but realize the potential consequences of documents you are about to sign. Stable income, healthy as a horse, then the risk is low.

As far as the $125 for a quarter percent. Calculate your total repayment under each plan including the $125 & determine which is cheaper for you. There are plenty of free finaicial calculator on the web that can do this for you.

I hope this helps, if not feel free to ignore the ramblings of an unqualified individual. /forums/images/graemlins/grin.gif

BigDave · Jan 17, 2004

Here's the danger of liens against one's home. Today on CNN they did a report of a retiree whose house was sold at auction. It turns out he didn't pay his home owner's association dues. They sent him 3 notices, put a public notice in the paper & then put his house up for auction. They gave him three days to vacate. His total unpaid debt: $120. /forums/images/graemlins/mad.gif

frank_f15 · Jan 17, 2004

THESE ARE strictly the ramblings of an ol man not an attorney, nor any kind of financial expert. I took out a HELOC about 20 years ago, to help if i was short for kids college tuition, hve used it many times but strickly as a slush fund, write a check against it and then pay it off quickly, when i do run a bal. never ever pay the min. as with everything it is all on how u use it.

Richard · Jan 19, 2004

( Is a home equity line of credit tax deductible for federal taxes?
)

I'm not a banker, atty, nor lawyer..but I DO work in the investment world.

My favorite "line" to someone when the moment arises (when they ask me a tax question) is...

"I view my job to be the one CAUSING the tax issues and let your tax man fix them" That's always said with a smile, but the upshot I try to drive across is, I'm not in the buisness of giving tax advice, nor fixing tax problems.

That said, somewhere on my path of life, I was once told that the interest of this kind of loan can only be deducted if you use the money for HOME improvement type things. IE, if you go buy a car, or vacation with it then technically, you can not deduct the expense. Build an addition or add a pool, and you can then deduct it.

I don't know the "real" answer as I prefer to NOT talk to the IRS as much as possible

/forums/images/graemlins/grin.gif

NY_Yankees_Fan · Jan 23, 2004

( Look at your amortization table for your home loan and determine how much interest you will be paying on your existing loan, then compare with the new loan. Be sure and compare apples to apples, because you could always pay off your existing home loan in two years if you plan on paying the new loan off in two years (i.e. don't compare interest over 5 years on the old loan to interest over 2 years on the new loan and attribute all of those savings to the new rate).

A simple concept, but many folks don't look at it that way. )

Fish thanks for your comment. We sat down and reviewed the info you suggested and we will save a whole $300 in interest. Given the bank will have a lean on our house for $100K, limit of the loan, we decided to pass on the bank offer and own the house free and clear in 20 months. WOW no loans to anyone not even to Kubota /forums/images/graemlins/grin.gif, well no loans until the kids go to college /forums/images/graemlins/tongue.gif

Thanks again

Kelvin · Jan 24, 2004

Around Jan 2002 I took out a 4.75% variable rate home equity loan and paid off my 8.00% fixed rate first mortgage.

There were no closing costs on the line-of-credit loan unless I CLOSED OUT the line-of-credit loan in less than 2 years. There was no penalty for paying the loan down to a zero balance; I just couldn't close the loan out or else I'd have to pay the closing cost of about $200.00. The loan nw has a zero balance but is still open in case I need (want?) it for something (like a new Kubota???).

My attitude was that reducing the loan rate from 8.0% to 4.75% was equivalent to investing at a guarenteed rate of return of 3.25% with NO tax liability on the return and NO risk. If the variable rate on the line-of-credit goes up in future years then the "guarenteed rate of return" would obviously go down. There are caps on the amount that the variable rate could climb each year. In my case, assuming no additional principal payments, my first mortgage would've been paid off in about 4 years. If the variable rate loan had of climbed at max rate each year it would've climbed above the 8.0% first mortgage rate at about the 4 year point. I planned for a 2 year pay-off and paid it off at the 13 month point. Now I am debt-free.

If you can pay off the loan in 2 years or less I would go for the Line-of-credit loan, assuming that you trust the bank that you are dealing with.

DISCLAIMER: I am not a banker nor an investment specialist. Now for MY OPINION: Regarding the question "why would the bank do this", I have the impression that the bank makes most of their money when they issue a loan (particularly 1st Mortgages), and that the profits that they make afterwards is usually a fixed percentage difference between the rate they borrowed the money and the rate they loaned the money to the customer. If the profit rate were 2%, then the bank could probably care less whether they borrowed at 2% and loaned at 4% or borrowed at 10% and loaned at 12%.

Kelvin

Kelvin · Jan 24, 2004

( Got a call from our bank asking if we were interested in a home equity line of credit. )

In addition to my other post that I just made, I'll make one counter point. I try to make a point to NEVER do buisness with phone solicitors. So while I may seriously consider an equity loan, I would not do it with a bank that calls my house.

Chances are that if this bank is calling your house asking for buisness, then there are other banks in town with better deals generating enough buisness such that they don't have to bother folks at home.

In my case I saw a newspaper advertisement about a bank's home equity rates and went and asked them about the details. I had never had any buisness dealings with this particular bank, but since their rates were MUCH better than any other in town, I opened an account and started doing buisness there.

One question that I am curious about. By calling the bank "our bank" you obviously do buisness there. Is this the same bank that you have your first mortgage with?

Kelvin