Help me understand an Equity Line loan?

[DeniseM]

My DH is sick of the situation where he works, and wants to retire at the end of the year. (As you may recall, his boss cancelled our Christmas trip to Hawaii, 10 days before we were supposed to leave.) Things have gone downhill from there. They are laying off more people, which will make it nearly impossible for him to get away from work for scheduled vacations, and force him to work 10-12 hours a day - on salary.

We saw our tax man yesterday, and we talked about paying off our mortgage, before DH retires. He advised us to refinance instead and get a "Equity Line Loan." He stated that it would lower our interest rate to 2.5% and there would be no points. I asked him some questions, but I still don't understand how this would be an advantage for us? We don't need to take any cash out of our equity.

Our mortgage is our only debt, and we are on track to pay it off in 3 years, but DH would like to retire at the end of 2012. After we retire, we will probably sell our house, move out of the area, and downsize.

 

[Steve]

My DH is sick of the situation where he works, and wants to retire at the end of the year. (As you may recall, his boss cancelled our Christmas trip to Hawaii, 10 days before we were supposed to leave.) Things have gone downhill from there. They are laying off more people, which will make it nearly impossible for him to get away from work for scheduled vacations, and force him to work 10-12 hours a day - on salary.

We saw our tax man yesterday, and we talked about paying off our mortgage, before DH retires. He advised us to refinance instead and get a "Equity Line Loan." He stated that it would lower our interest rate to 2.5% and there would be no points. I asked him some questions, but I still don't understand how this would be an advantage for us?

Our mortgage is our only debt, and we are on track to pay it off in 3 years, but DH would like to retire at the end of 2012. After we retire, we will probably sell our house, move out of the area, and downsize.

Hi Denise,

If you are planning to sell your house and move out of the area in about a year, then I would not refinance your house. In fact, with only three years left on your mortgage, it's probably unwise to refinance regardless of whether you plan to sell or not.

Home Equity Lines can be very useful, but I wouldn't get one in your situation. Also, it should be noted that these loans have variable interest rates...and rates are more likely to go up over the next year than down. I would just stick with what you have.

Steve

 

[VivianLynne]

While your DH is employed, he and you would qualify for a decent line of credit that you might need in the future - say to swing a bridge loan for a retirement home (until your home sold), to buy a car or to pay for medical care. The financial markets have seriously tightened up - esp for people without jobs.

It is NOT a dumb move - if you have the self-control to ONLY use it ofr emergencies.

 

[slip]

I don't think that makes sense here either. I would talk to a realtor and sell your
House now. You would pay off the mortgage and keep the rest for what you
Want to do. You didn't mention how far away you were relocating so if the house
Sells quickly you may have to rent for a while close to work. Then at the end of
The year relocate to where you want to be but who knows how long it will take to sell your house.

My DD was in a similar situation, where she owned a condo and was looking to
Relocate. She knew she couldn't afford to move and still own it so she sold the
Condo first and moved into a rental. 3 months later she took a job in Florida.
Just watch how long of a lease you would have to sign on the rental.

Hope everything works out for you two. It does sound like it may be a good time
To move on to the next chapter.

 

[rrlongwell]

... We saw our tax man yesterday, and we talked about paying off our mortgage, before DH retires. He advised us to refinance instead and get a "Equity Line Loan." He stated that it would lower our interest rate to 2.5% and there would be no points. I asked him some questions, but I still don't understand how this would be an advantage for us? We don't need to take any cash out of our equity ... Our mortgage is our only debt, and we are on track to pay it off in 3 years, but DH would like to retire at the end of 2012. After we retire, we will probably sell our house, move out of the area, and downsize.

If you are going to pay it off at the end of the year, this makes no since. However, what you may want to consider, is do what he said, he is right by the way, I have done it and my wife is a banker who's bank does this. Virtually all banks do this. No, this is not a solication, she works for a small bank that probably does not lend in your state (they only lend in a few states). If you take a line of credit and rent the house then you could have it both ways, access to

 

[DeniseM]

I should add that I will not retire at the end of the year. I will work at least another year for insurance coverage. We will not sell our house until I retire. It's possible that we'd be interested in buying a new home sooner than that.

Thanks,
D

 

[jmzf1958]

Denise, my understanding is there is a home equity line of credit and there is a home equity loan. The home equity line of credit payment changes as your balance goes down. This is usually at a variable interest rate. I took out a home equity loan at a fixed 3.5% rate through my credit union. The term could be from five to twenty-five years, and the closing costs were very low. If you refinanced, you'd pay much more in closing costs. You could take out a home equity loan and pay off your mortgage with the money, then when you do sell your house, you could just pay off the home equity loan.

I'm not sure why he wouldn't want you to pay off the mortgage outright, unless he's thinking you should keep your money liquid in case you need it for something. Judy

 

[MelBay]

Our tax guy advised us to get a HELOC while the rates are so cheap. This was his logic, all of which was hypothetical:

1. Let's say we need $30,000 fast (can't imagine why, but one never knows).
2. Let's assume we have another 2007/08 and the market tanks, and most of our $$$ is tied up there.
3. If that's the case, it's not the time to cash out to get our hands on $30,000.
4. We'd then take a $30,000 advance on our HELOC, make the payments, and when/if the market recovers, we'd pay it back.
5. His whole thing was based on a worse case scenario, like both of us losing our jobs, etc., in which case it would be tough for us to get a new loan.

So, we did it, paid off what was left of our mortgage, and then we paid that off way fast. We use it every now & then just so they don't cancel it.

If we bought a new car, we'd probably finance it that way, or if we found the perfect vacation place, we'd use it.

It cost us nothing to get it, and my philosophy was "why not". I haven't found a downside yet. It's just sort of an open line of credit, should we need it.

 

[Elan]

If he's suggesting taking out a HELOC while you're both still working, then I think it's a fantastic idea. Just make sure that you get one where you don't have to draw anything if you don't want/need to.

I think the advisers intent was for you to take out a HELOC to pay off your mortgage, then start applying your normal mortgage payment toward the HELOC. That is a sound strategy as well, but if you're 3 years from having your mortgage paid off, you're not going to be saving much in interest unless you're currently financed at an abnormally high rate.

 

[DeniseM]

We are financed at 4.25% and making double payments to pay it off early. I'm still not sure why we would want to do this. We an emergency fund and no foreseeable need for a HELOC. We are at the point where we pay cash for cars and appliances, etc. So, I still don't get it.

 

[gpurtz]

We are financed at 4.25% and making double payments to pay it off early. I'm still not sure why we would want to do this. We an emergency fund and no foreseeable need for a HELOC. We are at the point where we pay cash for cars and appliances, etc. So, I still don't get it.

Denise, your adviser may be looking at it this way. 2.5% is less than 4.25%. While this is true, if the prime rate rises so will the rate on your HELOC. The HELOC will give you options that you may not have without it. You may choose to finance that car instead of paying cash. You will more easily qualify for the HELOC if your husband is employed. Consider getting the HELOC and using it to pay off your current mortgage. Just make sure there are no hidden costs, e.g., appraisal fee, application fee, etc. If your HELOC interest rate increases, then you could pay it off, which was your original plan.

 

[easyrider]

If you take out the loan now instead of after your husband retires, your debt to income ratio is still high enough to get a loan.

Owning your house does not mean you would qualify for a new mortgage loan, especially with only one income.

 

[DeniseM]

We have no plans to get a new mortgage loan, or any loan.

 

[Elan]

We have no plans to get a new mortgage loan, or any loan.

The point is to secure the HELOC while you can. That doesn't mean you have to draw from it. Kind of like pre-qualifying for a mortgage -- doesn't mean you have to buy a house.

 

[Tia]

The point is to secure the HELOC while you can. That doesn't mean you have to draw from it. Kind of like pre-qualifying for a mortgage -- doesn't mean you have to buy a house.

It's why we have one ourselves, just in case.

 

[K&PFitz]

One other caveat: some home equity lines have an annual fee if they are not used, similar to a credit card annual fee. It's less common in competitive markets, but one of those "fine print" items you need to be aware of.

 

[davhu1]

Home equity loan normally has no closing cost, fixed rate for 10 years, and may payoff your debt quicker. (do not confuse with home equity line of credit). Determine what is the payoff amount (not the balance) in your existing mortgage. If you take out a equity loan in the same amount and make the same payment amount as your current mortgage, how long would it take to pay off your equity loan. If less than your current mortgage, get the the equity loan.

If you get variable rate, you may have to make some assumptions. Since it is for very short term, it is unlikely that it will increase more than 2%. If you average out the rate to 3.5%, would it still be worth taking out the loan. Or is you have savings, and the rate increase more than you like, pay off as much as you can on the balance of the loan.

We did that when we had about 5 years left and paid off in less than 3.

 

[pacodemountainside]

Hey Denise:

Have read your posts and interest in "home equity loan" loosely defined as several variations.

I would definitely recommend you go for it!

Considering you are financially conservative and do not run credit card balances would not be tempted to blow money on expensive vacation or luxury car.

With both of you working will get best interest rate and other terms. Definitely keep below 3.99% and no closing/out of pocket costs. There are definitely lower rates advertised, but getting can be a challenge based on my experience! Watch the fine print!

You will have a fall back position if financial disaster strikes.

Most are variable rates and eventually will go up. However, I am with pundits who point out if prime rate went to 5%-6%, interest on national debt would exceed budget.

You need to discuss with loan officer who is a salaried employee who is looking to develop a long term relationship not time share sales person that has to make next months rent! Once he has all your personal financial info can tailor a program to fit your needs. I use US Bank and web site has tons of info and am sure your bank has similar. By perusing you will be equipped to understand and discuss options.

Remember Bank is not getting any thing upfront but has to make some money. Just look at say $5K+ you paid when you bought house! So, may require immediately funding say a $5K loan , just use to pay down current one. May impose say $100 inactivity fee, just take out $1K loan and payoff! Will impose fee if cancelled in say one or two years. Will require you become a "preferred" customer and sign up for say four services. Maybe checking, savings-just put in $100, auto pay, set up bill pay account, get their credit card-I declined as I prefer air line, get ATM card -I declined as I cannot remember PIN, set up overdraft protection-if you or DH forgets to write down a check or math error in calculating balance just a $5.00 charge and check is not bounced, etc.

Congratulations on doubling up on mortgage payments. Doing so I had mortgage paid off when I retired at 55 and with cash bought beautiful condo in Colorado and invested rest to provide traveling, new SUV, fun money, etc. until SS kicked in at 62. Pension paid all the daily expenses.

Yes, do make sure you have heath insurance protection cast in concrete. Even a high deductible is better than nothing. Insurance companies never pay the rack rates. Getting older guarantees bigger medical bills.

Lastly do maximize IRA, 401K, 403B or any employer plan that offers tax advantage benefits. Compounding guarantees you a pile of cash after 30-40 year period if invested in no load, low expense fee mutual fund like Vanguard Total Market Index. No ties to VG and other funds offer similar. I suspect most us us missed Wyndham going up 14 time in last three years and I could only afford 100 shares of Apple at $190.

No, I am not a financial advisor just olde accountant who has lost his balance.


Paco

 

[NWL]

Hi Denise,

If you are planning to sell your house and move out of the area in about a year, then I would not refinance your house. In fact, with only three years left on your mortgage, it's probably unwise to refinance regardless of whether you plan to sell or not.

Home Equity Lines can be very useful, but I wouldn't get one in your situation. Also, it should be noted that these loans have variable interest rates...and rates are more likely to go up over the next year than down. I would just stick with what you have.

Steve

Ditto what Steve said! Sound advice.

IMO, HELOCs are only useful when you want to reinvest your money to improve your home.