HELP: Cant refinance HELOC - Use low rate credit cards?

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CodeMaster
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HELP: Cant refinance HELOC - Use low rate credit cards?

Post by CodeMaster » Wed Apr 02, 2008 1:52 am

Hi, I tried to refinance my HELOC recently but my home value has went down based on apprasals and I am not able to refinance!!!

As an alternative, American Express credit card is offering me balance transfer rate of 3.99% for 15k (my limit) for the LIFE of the balance with a max fee of $99.

I was wondering, does it make sense to balance transfer over 15k of my HELOC which is at a rate over 8% and go ahead and make minimum payments to the AE card which will slowly pay off principle and interest at a lower rate then HELOC?

I am afriad of credit cards and getting ripped off from their fine prints, any tips truly appreciated!!!

Valuethinker
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Re: HELP: Cant refinance HELOC - Use low rate credit cards?

Post by Valuethinker » Wed Apr 02, 2008 3:36 am

CodeMaster wrote:Hi, I tried to refinance my HELOC recently but my home value has went down based on apprasals and I am not able to refinance!!!

As an alternative, American Express credit card is offering me balance transfer rate of 3.99% for 15k (my limit) for the LIFE of the balance with a max fee of $99.

I was wondering, does it make sense to balance transfer over 15k of my HELOC which is at a rate over 8% and go ahead and make minimum payments to the AE card which will slowly pay off principle and interest at a lower rate then HELOC?

I am afriad of credit cards and getting ripped off from their fine prints, any tips truly appreciated!!!
Perhaps redundant advice, but in addition you should stop saving money into investment accounts, and pay down the debt.

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CodeMaster
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Post by CodeMaster » Wed Apr 02, 2008 10:53 am

I thought about doing that, except the HELOC is tax deductable so I felt paying it off may not be most optimal. Isnt that correct?

avalpert
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Depends

Post by avalpert » Wed Apr 02, 2008 11:54 am

If your heloc interest rate is 8% and you are in the 25% tac bracket (for example) then the real rate is 6% (assuming you would itemize anyway but don't need to complicate. Are your investment aftertax returns going to excede 6%? If yes, then it might make sense to borrow from home equity to invest, if not it won't.

Obviously, when you add in risk in both your heloc rate and investment reutrns it gets a little more complicated - but at its base you are borrowing money to invest it, are you comfortabel with that? All the tax deduction does is change the real cost of teh debt, its still debt.

As for the credit card, if it is really 3.9% for the life of the balance that is less than your heloc rate - even after the deduction - and obviously a better deal. But you do have to read it carefully, and is that $99 fee the balance transfer fee (equal to .66% of teh 15k) or is it a recurring fee?

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LH2004
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Re: HELP: Cant refinance HELOC - Use low rate credit cards?

Post by LH2004 » Wed Apr 02, 2008 12:01 pm

CodeMaster wrote:Hi, I tried to refinance my HELOC recently but my home value has went down based on apprasals and I am not able to refinance!!!

As an alternative, American Express credit card is offering me balance transfer rate of 3.99% for 15k (my limit) for the LIFE of the balance with a max fee of $99.

I was wondering, does it make sense to balance transfer over 15k of my HELOC which is at a rate over 8% and go ahead and make minimum payments to the AE card which will slowly pay off principle and interest at a lower rate then HELOC?
Yes!

You do need to be sure that you can keep up with the minimum payments, but it doesn't take too much rocket science to compare 3.99% + a $99 fee to 8%.

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mas
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Re: HELP: Cant refinance HELOC - Use low rate credit cards?

Post by mas » Wed Apr 02, 2008 12:36 pm

CodeMaster wrote:... any tips truly appreciated!!!
TIP: Make sure the card balance is $0 before doing the transfer, and once completed, do not make any new purchases with the card.

http://www.creditorweb.com/articles/avo ... takes.html

tan
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Post by tan » Wed Apr 02, 2008 12:44 pm

aren't they only tax deductible if you spent the money on home improvements (and not to pay down debt, buy a car, etc.)? did you do that?

user
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Post by user » Wed Apr 02, 2008 1:59 pm

Request a credit limit increase before you do it.

You want to borrow as much as you can (while still being able to meet the minimum payment, which for Amex is going to be 2% of your balance).

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LH2004
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Post by LH2004 » Wed Apr 02, 2008 2:20 pm

tan wrote:aren't they only tax deductible if you spent the money on home improvements (and not to pay down debt, buy a car, etc.)?
No.

Non-improvement home equity debt is deductible for ordinary tax, though not for AMT, up to $100,000.

Valuethinker
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Post by Valuethinker » Wed Apr 02, 2008 2:22 pm

CodeMaster wrote:I thought about doing that, except the HELOC is tax deductable so I felt paying it off may not be most optimal. Isnt that correct?
1. I wouldn't live with debt greater than my housing equity (debt in general is just not a good idea in my view)

2. an investment in paying down debt is a risk free return

The comparable pre tax investment return (risk free) is 4% on a government bond (4.5% for a long bond). Can you beat that, after tax?

If something happens in your life now that reduces your income, then you are going to lose your house. If you think that is likely, then you should not pay down debt, but hoard cash (because you can use that cash to pay the payments on the mortgage).

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CodeMaster
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Post by CodeMaster » Sat Apr 05, 2008 10:19 pm

Thank you for the all of the advice, I'm glad to see my calculation seem to work out correctly! Very much appreciate all of the response here.

Jack
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Post by Jack » Sun Apr 06, 2008 2:13 am

Beware of the universal default clause in most credit card contracts. If you miss a payment on any bill -- electric, phone, HELOC, whatever, even by a day -- the credit card company can jack up your rate to 30% or more overnight, regardless of the "lifetime" guarantee. Make sure you read the fine print.

TheEternalVortex
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Post by TheEternalVortex » Sun Apr 06, 2008 2:37 am

Jack wrote:Beware of the universal default clause in most credit card contracts. If you miss a payment on any bill -- electric, phone, HELOC, whatever, even by a day -- the credit card company can jack up your rate to 30% or more overnight, regardless of the "lifetime" guarantee. Make sure you read the fine print.
Not all cards have this (recently some have even advertised the fact because of consumer backlash). But of course it is important to check.

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wlpotts
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Post by wlpotts » Sun Apr 06, 2008 12:59 pm

WARNING:
If you do take the CC'd transfer, the $99 fee and all subsequent interest charges will accumulate at the the default interest rate charged by the card. This can add up over time.

Also, be sure you do not have any reoccuring charges or bill payments on the card. They too will be charged at your default interest rate. Any payments that you make over the life of the card balance will be attributed only to the lowest billed percentage rate balance items first, so all of those combined default interest charges will continue to rack up on your bill and compound.

Hope this helps!

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Some have it. Some don't. Either way, here I am!

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Post by White Coat Investor » Sun Apr 06, 2008 2:07 pm

Valuethinker wrote: 1. I wouldn't live with debt greater than my housing equity (debt in general is just not a good idea in my view)
Did you mean the equity, or the value of the house? Your statement could be interpreted as advocating at least a 50% down payment on all houses.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Post by Valuethinker » Sun Apr 06, 2008 2:47 pm

EmergDoc wrote:
edited by Valuethinker, see below
Last edited by Valuethinker on Sun Apr 06, 2008 2:48 pm, edited 1 time in total.

Valuethinker
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Post by Valuethinker » Sun Apr 06, 2008 2:47 pm

EmergDoc wrote:
Valuethinker wrote: 1. I wouldn't live with debt greater than my housing equity (debt in general is just not a good idea in my view)
Did you mean the equity, or the value of the house? Your statement could be interpreted as advocating at least a 50% down payment on all houses.
Sorry you are right I am being imprecise. Mea culpa.

What I meant was:

Total debt > gross value of house => (Net Assets < 0)

So own a $500k house, have $550k of debt.

Even in situations where I felt it was a very good idea to invest (matching 401k?) I would want to have at least 0 equity, not negative equity.

ziggy29
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Post by ziggy29 » Sun Apr 06, 2008 2:55 pm

wlpotts wrote:Also, be sure you do not have any reoccuring charges or bill payments on the card. They too will be charged at your default interest rate. Any payments that you make over the life of the card balance will be attributed only to the lowest billed percentage rate balance items first, so all of those combined default interest charges will continue to rack up on your bill and compound.
This was exactly what I was going to say here.

Let's say you refi'd a $25,000 HELOC at a 3.99% lifetime guarantee. However, new purchases have an interest rate of, say, 12%.

Now you go out and buy a $5,000 home entertainment system. No problem, you're getting a $5,000 bonus next month and can afford to use that to pay down the extra charges.

The problem is, you now have $30,000 in debt -- $25K at 3.99% and $5,000 at 12%. In many cases, you will not start paying down the high interest debt until ALL the lower-interest debt is eliminated! So if you made a $5,000 payment with your bonus a month from now -- hoping to get rid of the new debt -- you'd have $20K in debt at 3.99% and $5,000 at 12%. And that $5,000 (which becomes $5,634 after a year of interest at 1% per month) continues to compound at 12% until you've eliminated all of the original balance accruing at 3.99%.

Only after paying all of the $25K original balance (and associated interest) will you even *begin* to pay down the portion at 12%.

This is how credit card issuers "win" with balance transfers. A lot of people who transfer large amounts and then charge more are likely doomed to have a high-interest debt that just grows and grows and grows at double digit rates, and you can't start attacking it until the low-interest debt is all gone.

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Post by old_dominion » Sun Apr 06, 2008 8:25 pm

wlpotts wrote:If you do take the CC'd transfer, the $99 fee and all subsequent interest charges will accumulate at the the default interest rate charged by the card.
That isn't correct for most credit card BT offers, and I know it isn't true for American Express. If you really want more details on how to efficiently get low rate funds from credit cards, you should try the following forum:

http://www.fatwallet.com/c/52

There are detailed lists of things that can go wrong, possible credit report impacts, and pretty much anything else you might want to know.

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