Are HELOC rate adjustments predictable?

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jcw
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Are HELOC rate adjustments predictable?

Post by jcw » Sat Jan 11, 2014 1:55 pm

Hello,

I have drawn from my HELOC which I've had since 2009. It was and has stayed at 3% and never moved. I'm estimating that it will take 3 years to pay off the balance. I'm concerned that rates may go up in that time but was hoping to get some guidance on it. Is there any way to tell if rates will increase?

To give context, I drew from my HELOC to pay for an MBA program. Current government rates on loans are at 6.8% so I utilized my HELOC to pay while I was in school. Now that I've graduated, I'm in the process of paying it all off.

thanks

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G-Money
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Re: Are HELOC rate adjustments predictable?

Post by G-Money » Sat Jan 11, 2014 2:34 pm

HELOCs are nice because you don't need to draw all of the money at once. You can tap your equity when you need it. As you noted, the major drawback is that their interest rate is variable. So it's best not to have significant money drawn on a HELOC for extended periods of time.

Most HELOCs are tied to the Prime rate of interest. Here's a quick definition of the prime rate: http://www.bankrate.com/rates/interest- ... -rate.aspx. The rate can change at any time, but, it's stayed at 3.25% for more than 5 years now. Here's a chart showing historical Prime Rates: http://www.fedprimerate.com/wall_street ... istory.htm

Some HELOCs allow you to lock in an interest rate over a set period of time. This option usually requires the repayment of both principal and interest, similar to a mortgage.

If you think you are done drawing from the HELOC, consider using a Home Equity Loan (HEL). This is like a mini-mortgage; set principal & interest repayments, and often (but not always) can take second lien position if you already have a mortgage on your house. PenFed has one for 60 months at 2.49%, but I'm not sure if it can take second lien position: https://www.penfed.org/Home-Equity-Loan/?WT.ac=1230. You shouldn't need to pay closing costs, except perhaps for an appraisal.

Depending on the amount borrowed (and if you own a car that isn't already financed), you may be able to use auto loans. PenFed is offering 36 month auto loans at 0.99%. https://www.penfed.org/Auto-Loans-Overview/?WT.ac=1265

One other option would be to do a cash-out refi on your home, large enough to cover your mortgage (if you have one) and the HELOC draw. But without knowing your current rate and LTV, this may not be a viable option.

Otherwise, just keep your nose to the grindstone and continue working on paying off the HELOC balance. With each passing month that you pay down principal, your interest rate risk exposure diminishes.
Don't assume I know what I'm talking about.

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grabiner
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Re: Are HELOC rate adjustments predictable?

Post by grabiner » Sat Jan 11, 2014 4:23 pm

G-Money wrote:HELOCs are nice because you don't need to draw all of the money at once. You can tap your equity when you need it. As you noted, the major drawback is that their interest rate is variable. So it's best not to have significant money drawn on a HELOC for extended periods of time.

Most HELOCs are tied to the Prime rate of interest. Here's a quick definition of the prime rate: http://www.bankrate.com/rates/interest- ... -rate.aspx. The rate can change at any time, but, it's stayed at 3.25% for more than 5 years now. Here's a chart showing historical Prime Rates: http://www.fedprimerate.com/wall_street ... istory.htm
Note that the prime rate is a short-term rate. Other variable-rate loans are tied to different short-term rates such as the one-year LIBOR, one-year Treasury rate, or 11th District Cost of Funds. All of these rates should move together reasonably reliably, and all can be volatile because they reflect short-term expectations.
Wiki David Grabiner

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G-Money
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Re: Are HELOC rate adjustments predictable?

Post by G-Money » Sat Jan 11, 2014 5:12 pm

^ Right. That's why the rest of my post was explaining financing options that would offer a fixed rate over the next 3-5 years.
Don't assume I know what I'm talking about.

jcw
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Re: Are HELOC rate adjustments predictable?

Post by jcw » Sun Jan 12, 2014 1:45 am

G-Money wrote:HELOCs are nice because you don't need to draw all of the money at once. You can tap your equity when you need it. As you noted, the major drawback is that their interest rate is variable. So it's best not to have significant money drawn on a HELOC for extended periods of time.

Most HELOCs are tied to the Prime rate of interest. Here's a quick definition of the prime rate: http://www.bankrate.com/rates/interest- ... -rate.aspx. The rate can change at any time, but, it's stayed at 3.25% for more than 5 years now. Here's a chart showing historical Prime Rates: http://www.fedprimerate.com/wall_street ... istory.htm

Some HELOCs allow you to lock in an interest rate over a set period of time. This option usually requires the repayment of both principal and interest, similar to a mortgage.

If you think you are done drawing from the HELOC, consider using a Home Equity Loan (HEL). This is like a mini-mortgage; set principal & interest repayments, and often (but not always) can take second lien position if you already have a mortgage on your house. PenFed has one for 60 months at 2.49%, but I'm not sure if it can take second lien position: https://www.penfed.org/Home-Equity-Loan/?WT.ac=1230. You shouldn't need to pay closing costs, except perhaps for an appraisal.

Depending on the amount borrowed (and if you own a car that isn't already financed), you may be able to use auto loans. PenFed is offering 36 month auto loans at 0.99%. https://www.penfed.org/Auto-Loans-Overview/?WT.ac=1265

One other option would be to do a cash-out refi on your home, large enough to cover your mortgage (if you have one) and the HELOC draw. But without knowing your current rate and LTV, this may not be a viable option.

Otherwise, just keep your nose to the grindstone and continue working on paying off the HELOC balance. With each passing month that you pay down principal, your interest rate risk exposure diminishes.
Thanks for the input. I saw the penfed HEL and tried to apply but I got rejected because my property has turned into an investment property. I wouldn't want to refinance the house right now because I've got a super low rate (3.25%) that can't be matched at this time.

Interesting idea on the auto loan at .99%. Can you explain how that would work? I have never actually got an auto loan because I usually pay all cash for my cars. After graduating, I paid all cash for a used car and do not have a loan on it. Is there a way to get an auto loan for the full value of my vehicle and then use the loan to pay off the HELOC? If so, that would be awesome.

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G-Money
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Re: Are HELOC rate adjustments predictable?

Post by G-Money » Sun Jan 12, 2014 2:02 am

jcw wrote:Interesting idea on the auto loan at .99%. Can you explain how that would work? I have never actually got an auto loan because I usually pay all cash for my cars. After graduating, I paid all cash for a used car and do not have a loan on it. Is there a way to get an auto loan for the full value of my vehicle and then use the loan to pay off the HELOC? If so, that would be awesome.
It's pretty simple. I did it a year ago on a car that I owned outright.

You apply online. The loan limits had been (maybe still are) 100% of NADA clean retail value. You can get a ballpark estimate of what that limit would be here: http://www.nadaguides.com

The application is short and sweet. Much quicker than applications for mortgages. In the application, you'll note that there is no existing loan, and that the check should be mailed to you. If you're approved, PenFed will send you a form for you to sign. You need to mail them your title. They mail you a check for the loan amount. Once you deposit it, you can pay off some or all of your HELOC. Then just pay back the auto loan on a fully amortizing basis over the next 3 years (or longer, if you take a rate higher than 0.99%).
Don't assume I know what I'm talking about.

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BrandonBogle
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Re: Are HELOC rate adjustments predictable?

Post by BrandonBogle » Sun Jan 12, 2014 2:05 am

That's what I did. I got an auto loan from PenFed in the form of a check for the max value they would finance my car. I cashed that check and sent in the payment for my 6.8% student loans. Now my loans are riding at 1.49%!

jcw
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Re: Are HELOC rate adjustments predictable?

Post by jcw » Mon Jan 13, 2014 1:25 am

G-Money wrote:
jcw wrote:Interesting idea on the auto loan at .99%. Can you explain how that would work? I have never actually got an auto loan because I usually pay all cash for my cars. After graduating, I paid all cash for a used car and do not have a loan on it. Is there a way to get an auto loan for the full value of my vehicle and then use the loan to pay off the HELOC? If so, that would be awesome.
It's pretty simple. I did it a year ago on a car that I owned outright.

You apply online. The loan limits had been (maybe still are) 100% of NADA clean retail value. You can get a ballpark estimate of what that limit would be here: http://www.nadaguides.com

The application is short and sweet. Much quicker than applications for mortgages. In the application, you'll note that there is no existing loan, and that the check should be mailed to you. If you're approved, PenFed will send you a form for you to sign. You need to mail them your title. They mail you a check for the loan amount. Once you deposit it, you can pay off some or all of your HELOC. Then just pay back the auto loan on a fully amortizing basis over the next 3 years (or longer, if you take a rate higher than 0.99%).
Wow that is genius! Thanks! I may get a loan to lock in the .99% rate for 36 months. Since the HELOC is tax deductible and the auto loan is not, I wouldn't save a ton but it's nice to know that the auto loan cannot adjust.

Do you think it's possible to do the 18 month 0% balance transfer from Penfed to get an even better deal?

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G-Money
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Re: Are HELOC rate adjustments predictable?

Post by G-Money » Mon Jan 13, 2014 2:24 pm

jcw wrote:Do you think it's possible to do the 18 month 0% balance transfer from Penfed to get an even better deal?
My guess is it is possible, but it probably is not a better deal. There's a 3% balance transfer fee, which makes it less appealing.

If you want to play the 0% balance transfer game, there are better cards available. Chase Slate card comes to mind (0% APR for 15 months, no balance transfer fee). http://www.nerdwallet.com/balance-transfer-credit-cards

Personally, I wouldn't consider using a 0% BT unless I was confident the whole thing would be paid off by the end of the 0% period. I would not want to count on another no-fee, 0% BT offer being available when the clock strikes midnight. Haven't used a BT yet, but might when I'm down to about 1 year left on my mortgage.
Don't assume I know what I'm talking about.

curmudgeon
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Re: Are HELOC rate adjustments predictable?

Post by curmudgeon » Mon Jan 13, 2014 4:14 pm

While in theory short-term rates are pretty volatile, the fed has made fairly strong commitments to holding down short-term rates for at least the next 18 months. I would look at what your HELOC rate is specifically tied to. If it's something like prime rate, I might just leave it be and get on with paying the loan down. If you were expecting a significantly longer payback period, it might be different, but I expect you are OK on this. Even if the rate starts moving up towards 4 or 5 percent in a couple of years, you should be paid down quite a bit by that time, so the extra interest wouldn't be all that much.

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