HELOC versus personal loan

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mahgeetah01
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HELOC versus personal loan

Post by mahgeetah01 »

I am looking to renovate my living room at a cost of $25-30K, which I plan to fully pay off in 3-5 years. I have an option for a HELOC at about 6.75% (variable) and an option for a loan through Lightstream at about 5% (fixed, 36 month term).

I suppose the HELOC would be nice to have for future loan needs, but it does have the higher (and variable) interest rate. The HELOC also requires some hurdles and takes about 4-5 weeks to obtain. Is this a toss-up or is there a better option of the two?

Thank you.
4th and Inches
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Re: HELOC versus personal loan

Post by 4th and Inches »

6.75%? There are better HELOC rates out there. I have a HELOC for 4.75% at Alliant Credit Union. It does have a $50 fee after the first year. Depending on your situation a HELOC may have tax deductible interest as well.
Jack FFR1846
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Re: HELOC versus personal loan

Post by Jack FFR1846 »

We took out a HELOC when adopting our first son, 22 years ago. It is still in place, cost nothing to initially take out and is an instant source of cash if needed. Unlike a personal loan, when a HELOC goes to zero, it's still available in full. So I can pull $40k out of the air by writing a check from the HELOC.
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MotoTrojan
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Re: HELOC versus personal loan

Post by MotoTrojan »

mahgeetah01 wrote: Wed Apr 03, 2019 10:06 am I am looking to renovate my living room at a cost of $25-30K, which I plan to fully pay off in 3-5 years. I have an option for a HELOC at about 6.75% (variable) and an option for a loan through Lightstream at about 5% (fixed, 36 month term).

I suppose the HELOC would be nice to have for future loan needs, but it does have the higher (and variable) interest rate. The HELOC also requires some hurdles and takes about 4-5 weeks to obtain. Is this a toss-up or is there a better option of the two?

Thank you.
Unless you are holding all investment until paid off (taxable even more so) this is a bad idea. An after-tax 5-6.75% return would be a gift.
Topic Author
mahgeetah01
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Re: HELOC versus personal loan

Post by mahgeetah01 »

MotoTrojan wrote: Wed Apr 03, 2019 10:24 am
mahgeetah01 wrote: Wed Apr 03, 2019 10:06 am I am looking to renovate my living room at a cost of $25-30K, which I plan to fully pay off in 3-5 years. I have an option for a HELOC at about 6.75% (variable) and an option for a loan through Lightstream at about 5% (fixed, 36 month term).

I suppose the HELOC would be nice to have for future loan needs, but it does have the higher (and variable) interest rate. The HELOC also requires some hurdles and takes about 4-5 weeks to obtain. Is this a toss-up or is there a better option of the two?

Thank you.
Unless you are holding all investment until paid off (taxable even more so) this is a bad idea. An after-tax 5-6.75% return would be a gift.
Thank you. I'm not sure I follow - what, exactly, is the bad idea here? Taking out the loan in the first place or my plan to pay off in 3-5 years?
cherijoh
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Re: HELOC versus personal loan

Post by cherijoh »

mahgeetah01 wrote: Wed Apr 03, 2019 10:06 am I am looking to renovate my living room at a cost of $25-30K, which I plan to fully pay off in 3-5 years. I have an option for a HELOC at about 6.75% (variable) and an option for a loan through Lightstream at about 5% (fixed, 36 month term).

I suppose the HELOC would be nice to have for future loan needs, but it does have the higher (and variable) interest rate. The HELOC also requires some hurdles and takes about 4-5 weeks to obtain. Is this a toss-up or is there a better option of the two?

Thank you.
I would look for a different lender. The rate isn't great and that is a long time to wait for a HELOC. The rate for a collateralized loan (e.g., mortgage, HELOC, auto loan) should be lower than an unsecured personal loan.

How much equity do you have in your house? When I got my HELOC (before housing crisis), the rates were actually lower if you took out a larger line of credit even if you had no intention of using it.

Another option would be a shorter-term fixed rate home equity loan (as opposed to home equity line of credit).
MotoTrojan
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Re: HELOC versus personal loan

Post by MotoTrojan »

mahgeetah01 wrote: Wed Apr 03, 2019 10:27 am
MotoTrojan wrote: Wed Apr 03, 2019 10:24 am
mahgeetah01 wrote: Wed Apr 03, 2019 10:06 am I am looking to renovate my living room at a cost of $25-30K, which I plan to fully pay off in 3-5 years. I have an option for a HELOC at about 6.75% (variable) and an option for a loan through Lightstream at about 5% (fixed, 36 month term).

I suppose the HELOC would be nice to have for future loan needs, but it does have the higher (and variable) interest rate. The HELOC also requires some hurdles and takes about 4-5 weeks to obtain. Is this a toss-up or is there a better option of the two?

Thank you.
Unless you are holding all investment until paid off (taxable even more so) this is a bad idea. An after-tax 5-6.75% return would be a gift.
Thank you. I'm not sure I follow - what, exactly, is the bad idea here? Taking out the loan in the first place or my plan to pay off in 3-5 years?
My point is that these interest rates are quite high so if you can’t get by without the loan then do what you have to, but if you are still investing in equities (and even more so bonds) while holding the loan, you’d be far better off putting that money towards payoff.

I might not realize a large equity cap-gain but I’d certainly sell bonds earning 2.5% before taking a 5% loan. Then I’d pay myself back by buying bonds again.
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dm200
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Re: HELOC versus personal loan

Post by dm200 »

mahgeetah01 wrote: Wed Apr 03, 2019 10:06 am I am looking to renovate my living room at a cost of $25-30K, which I plan to fully pay off in 3-5 years. I have an option for a HELOC at about 6.75% (variable) and an option for a loan through Lightstream at about 5% (fixed, 36 month term).
I suppose the HELOC would be nice to have for future loan needs, but it does have the higher (and variable) interest rate. The HELOC also requires some hurdles and takes about 4-5 weeks to obtain. Is this a toss-up or is there a better option of the two?
Thank you.
Consider, instead, a Home Equity Loan - not the line of credit. The rate would be fixed for the term (maybe 4.75% or so for ten years). You should be able to do the paperwork and have it in 1-2 weeks or so.
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ruralavalon
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Re: HELOC versus personal loan

Post by ruralavalon »

mahgeetah01 wrote: Wed Apr 03, 2019 10:06 am I am looking to renovate my living room at a cost of $25-30K, which I plan to fully pay off in 3-5 years. I have an option for a HELOC at about 6.75% (variable) and an option for a loan through Lightstream at about 5% (fixed, 36 month term).

I suppose the HELOC would be nice to have for future loan needs, but it does have the higher (and variable) interest rate. The HELOC also requires some hurdles and takes about 4-5 weeks to obtain. Is this a toss-up or is there a better option of the two?

Thank you.
If you cannot pay for the renovation out of current income, then I suggest the 5% fixed rate loan.
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ruralavalon
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Re: HELOC versus personal loan

Post by ruralavalon »

mahgeetah01 wrote: Wed Apr 03, 2019 10:06 am I am looking to renovate my living room at a cost of $25-30K, which I plan to fully pay off in 3-5 years. I have an option for a HELOC at about 6.75% (variable) and an option for a loan through Lightstream at about 5% (fixed, 36 month term).

I suppose the HELOC would be nice to have for future loan needs, but it does have the higher (and variable) interest rate. The HELOC also requires some hurdles and takes about 4-5 weeks to obtain. Is this a toss-up or is there a better option of the two?

Thank you.
You are in the 32% tax bracket, why can you not pay for the renovation out of current income?

You have an "old taxable account through a brokerage that has a couple stocks with significant % gains and a few high-expense ratio (about .70) mutual funds. The mutual funds are fairly active and produce large annual capital gains distributions". You will probably want to get rid of those high expense funds which are not tax-efficient. So why not use sell those funds, and use the some of the proceeds to pay for the renovation?

If you cannot pay for the renovation out of current income or from selling funds you need to get rid of anyway, then I suggest the 5% fixed rate loan.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Lafder
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Re: HELOC versus personal loan

Post by Lafder »

If you take out a 30k loan at 6.75% and take 5 years to pay it off, that is quite a lot of interest.

If you on the other hand save what you would be making in payments, you can "pay yourself" by accumulating the interest to add into your own project over the next several years. It raises your budget and leave you with no debt.

It also gives you a feel of what the extra payments would feel like month to month.

Some credit cards offer 0% interest for 18 months. I would be more tempted to do that than a 6.75% loan that will have extra fees each year.

The nice thing about a HELOC as mentioned is you only pay interest on the balance. But there is an annual fee. Many have a set term such as ten years you can draw from it, then it switches to payback only. In our case there is a 50$ annual fee regardless of balance.

I think HELOC interest is no longer tax deductible unless it is a rental.

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8foot7
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Re: HELOC versus personal loan

Post by 8foot7 »

6.75% is not a rate at which I would voluntarily borrow money.
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Re: HELOC versus personal loan

Post by willthrill81 »

MotoTrojan wrote: Wed Apr 03, 2019 10:30 amI might not realize a large equity cap-gain but I’d certainly sell bonds earning 2.5% before taking a 5% loan. Then I’d pay myself back by buying bonds again.
:thumbsup Ditto that.
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mahgeetah01
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Re: HELOC versus personal loan

Post by mahgeetah01 »

ruralavalon wrote: Wed Apr 03, 2019 10:50 am
mahgeetah01 wrote: Wed Apr 03, 2019 10:06 am I am looking to renovate my living room at a cost of $25-30K, which I plan to fully pay off in 3-5 years. I have an option for a HELOC at about 6.75% (variable) and an option for a loan through Lightstream at about 5% (fixed, 36 month term).

I suppose the HELOC would be nice to have for future loan needs, but it does have the higher (and variable) interest rate. The HELOC also requires some hurdles and takes about 4-5 weeks to obtain. Is this a toss-up or is there a better option of the two?

Thank you.
You are in the 32% tax bracket, why can you not pay for the renovation out of current income?

You have an "old taxable account through a brokerage that has a couple stocks with significant % gains and a few high-expense ratio (about .70) mutual funds. The mutual funds are fairly active and produce large annual capital gains distributions". You will probably want to get rid of those high expense funds which are not tax-efficient. So why not use sell those funds, and use the some of the proceeds to pay for the renovation?

If you cannot pay for the renovation out of current income or from selling funds you need to get rid of anyway, then I suggest the 5% fixed rate loan.
Thanks. I do still have this old taxable account which I can partially liquidate to pay for the renovation straight up. It sounds like your view is that this is the better long-term play, versus letting this taxable account ride in the market (while dealing with annual cap gains distributions) and making monthly loan payments?
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Re: HELOC versus personal loan

Post by mega317 »

You have gotten a lot of response about the HELOC which is good advice. I don't think I saw anyone say that it's a BAD idea to take out a 36 month loan that might take you 5 years to pay off!!
https://www.bogleheads.org/forum/viewtopic.php?t=6212
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dm200
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Re: HELOC versus personal loan

Post by dm200 »

mega317 wrote: Wed Apr 03, 2019 12:15 pm You have gotten a lot of response about the HELOC which is good advice. I don't think I saw anyone say that it's a BAD idea to take out a 36 month loan that might take you 5 years to pay off!!
I will repeat suggestion for fixed term Home Equity - rate fixed for the term. My wife and I just got a ten year at 4.75%
AtlBoglehead
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Re: HELOC versus personal loan

Post by AtlBoglehead »

Disclaimer: I'm not a CPA. But I think the HELOC is still deductible, if used for certain purposes, including, among others, home improvement.
Gibby45
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Re: HELOC versus personal loan

Post by Gibby45 »

OP,

Check local credit unions. Many have intro rates for the first year in the 3% range. 6.75% does not sound like a competitive rate. I would opt for the HELOC which would be tax deductible for your intended purposes. Make sure you have contractors, scope of work, etc. lined up first. It can take up to 6 weeks for the HELOC to go through. If you find a good intro rate, you don't want to waste that time.
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ruralavalon
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Re: HELOC versus personal loan

Post by ruralavalon »

mahgeetah01 wrote: Wed Apr 03, 2019 11:06 am
ruralavalon wrote: Wed Apr 03, 2019 10:50 am
mahgeetah01 wrote: Wed Apr 03, 2019 10:06 am I am looking to renovate my living room at a cost of $25-30K, which I plan to fully pay off in 3-5 years. I have an option for a HELOC at about 6.75% (variable) and an option for a loan through Lightstream at about 5% (fixed, 36 month term).

I suppose the HELOC would be nice to have for future loan needs, but it does have the higher (and variable) interest rate. The HELOC also requires some hurdles and takes about 4-5 weeks to obtain. Is this a toss-up or is there a better option of the two?

Thank you.
You are in the 32% tax bracket, why can you not pay for the renovation out of current income?

You have an "old taxable account through a brokerage that has a couple stocks with significant % gains and a few high-expense ratio (about .70) mutual funds. The mutual funds are fairly active and produce large annual capital gains distributions". You will probably want to get rid of those high expense funds which are not tax-efficient. So why not use sell those funds, and use the some of the proceeds to pay for the renovation?

If you cannot pay for the renovation out of current income or from selling funds you need to get rid of anyway, then I suggest the 5% fixed rate loan.
Thanks. I do still have this old taxable account which I can partially liquidate to pay for the renovation straight up. It sounds like your view is that this is the better long-term play, versus letting this taxable account ride in the market (while dealing with annual cap gains distributions) and making monthly loan payments?
Correct, that is my view.

Liquidate some of the undesirable taxable investments, and pay for the renovations outright with no loan at all.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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