HELOC vs Home Equity Loan... what's the catch?

[dollars and sense]

I refinanced my $90K 2nd mortgage as a 20-yr term Home Equity Loan with US Bank @ 9% interest fixed rate, earlier this year in March/April of 2024. Now with lower interest rates 6 months later, I'm trying to refinance it again (zero closing costs, all fees rolled into new loan) at a new quoted fixed rate of 8%, with the same 20-yr term, no $$ out of pocket, and lower monthly payments.

However, the representative presented me with the exciting offer of a HELOC instead and told me it was fixed at the quoted rate of 8% but I have the option to lock it in at a lower rate for free any time rates fall over the next 10 years. Then after 10 years it is locked in at that rate with amortized payments over the next 20 years. The HELOC would have a $75 annual fee.

Aside from the relatively small annual fee for the HELOC.... what's the catch? The representative could not present me with any other downsides and gushed about how much better it was than a Home Equity Loan (that requires costly applications fees to refinance to a lower rate each time rates fall).

I feel like I must be missing something, otherwise I don't know why a Home Equity Loan would even be offered as a product vs. the HELOC.

Can anyone enlighten me as to the downsides of a HELOC or fine print that I'm missing?

[alex_686]

Can anyone enlighten me as to the downsides of a HELOC or fine print that I'm missing?

Not much. It has much greater flexibility than a standard mortgage. There is going to be a behavioral issue in that you are going to have a supper duper line-of-credit just like a supper duper credit card.

Banks have a strong preference for HELOC. Every time you do a mortgage you have to file paperwork with the county. With a HELOC you don't have to file that mortgage paperwork for a long time.

I have had one on my home for the past 30 years.

[delamer]

How long is the 8% rate guaranteed on the HELOC? And how is the rate calculated once it can change?

[Silk McCue]

Our ThirdFederal Heloc rate floats with Prime minus 1.01% so currently 6.99%. We got prior to retiring and currently have no balance on it.

Cheers

[BruDude]

HELOC is variable rate and equity loan is fixed rate. It sounds like the rate lock offer can only be used one time and is probably for a limited timeframe. Read the fine print and see what it says.

[alex_686]

HELOC is variable rate and equity loan is fixed rate

Most banks offer to convert a portion of the HELOC into a fixed rate loan. That is what the OP is describing.

[dollars and sense]

How long is the 8% rate guaranteed on the HELOC? And how is the rate calculated once it can change?

My understanding is that the 8% rate is guaranteed for the life of the HELOC. And if rates fall within the first 10 years of the HELOC I can lock it into the lower rate for free (and now that new rate is guaranteed for the remaining life of the HELOC, unless I do it again at an even lower rate).

[dollars and sense]

HELOC is variable rate and equity loan is fixed rate. It sounds like the rate lock offer can only be used one time and is probably for a limited timeframe. Read the fine print and see what it says.

What I was told was quite different. The HELOC is offered in a variable/floating rate but also offered in fixed rate (the 8% I was quoted). And locking into a lower rate can be done multiple times within the first 10 years of having the HELOC, but those are details spoken that I would need to see confirmed in writing.

[Silk McCue]

Who is offering this HELOC?

Cheers

[delamer]

How long is the 8% rate guaranteed on the HELOC? And how is the rate calculated once it can change?

My understanding is that the 8% rate is guaranteed for the life of the HELOC. And if rates fall within the first 10 years of the HELOC I can lock it into the lower rate for free (and now that new rate is guaranteed for the remaining life of the HELOC, unless I do it again at an even lower rate).

That’s interesting. And also not my experience with how HELOCs work, but it’s been 10 years since I had one.

[dollars and sense]

Who is offering this HELOC?

Cheers

This is being offered by US Bank.
https://www.usbank.com/home-loans/home- ... %20balance.

[PeninsulaPerson]

How long is the 8% rate guaranteed on the HELOC? And how is the rate calculated once it can change?

My understanding is that the 8% rate is guaranteed for the life of the HELOC. And if rates fall within the first 10 years of the HELOC I can lock it into the lower rate for free (and now that new rate is guaranteed for the remaining life of the HELOC, unless I do it again at an even lower rate).

That’s interesting. And also not my experience with how HELOCs work, but it’s been 10 years since I had one.

+1

By definition, rates are not locked on a HELOC tho' some banks allow a borrower to pay back a used part of the line at a fixed rate.

The OP might want to be very sure that they understand what they're being offered.

Plus HELOC rates tend to be higher than mortgage rates, so not sure why the OP would go with a HELOC and not a mortgage.

[PeninsulaPerson]

I refinanced my $90K 2nd mortgage as a 20-yr term Home Equity Loan with US Bank @ 9% interest fixed rate, earlier this year in March/April of 2024.

Your existing 2nd mortgage - so you already have a mortgage and an equity loan or line?

Aside from the relatively small annual fee for the HELOC.... what's the catch? The representative could not present me with any other downsides and gushed about how much better it was ...

I feel like I must be missing something ...

What's the catch - not sure but it sounds like you may be missing something.

What's your credit score that you are being offered such high rates?

Why not refi both loans into a new 30-year or 20-year at a mortgage rate of - say - about 6%?

[dollars and sense]

I refinanced my $90K 2nd mortgage as a 20-yr term Home Equity Loan with US Bank @ 9% interest fixed rate, earlier this year in March/April of 2024.

Your existing 2nd mortgage - so you already have a mortgage and an equity loan or line?

Aside from the relatively small annual fee for the HELOC.... what's the catch? The representative could not present me with any other downsides and gushed about how much better it was ...

I feel like I must be missing something ...

What's the catch - not sure but it sounds like you may be missing something.

What's your credit score that you are being offered such high rates?

Why not refi both loans into a new 30-year or 20-year at a mortgage rate of - say - about 6%?

Yes my primary 1st mortgage is $320K, 30-yr fixed term, 2.75% rate with Mr. Cooper. Obviously with this low rate I do not want to touch it (or consolidate it with the 2nd mortgage). My credit score is 800+.

I know some lenders offer lower rates for refinancing, but they come with closing costs and/or points. My rate is slightly higher as it has not closing costs and rolls all fees into the loan (making it easy to do the math on a refinance with no money out of pocket).

[PeninsulaPerson]

Yes my primary 1st mortgage is $320K, 30-yr fixed term, 2.75% rate with Mr. Cooper. Obviously with this low rate I do not want to touch it (or consolidate it with the 2nd mortgage). My credit score is 800+.

Okay - well that makes sense.

A HELOC is usually an adjustable so you will want to be sure you understand what you're being offered and when you will possibly have to it off or refinance it.

Also there are HELOCs around here are advertised with no closing costs and substantially lower rates than what you're talking about so it might benefit you to shop around.

Good luck with it!

[alex_686]

How long is the 8% rate guaranteed on the HELOC? And how is the rate calculated once it can change?

My understanding is that the 8% rate is guaranteed for the life of the HELOC. And if rates fall within the first 10 years of the HELOC I can lock it into the lower rate for free (and now that new rate is guaranteed for the remaining life of the HELOC, unless I do it again at an even lower rate).

The rate floats. The current rate is 8%. The rate may be higher or lower in the future.

You can lock in a portion of HELOC at a specified rate. This can change at any time. Currently, thanks to the inverted-to-flat yield curve, you can lock in at 8% for any length of time.

New money at a new time will have different rates.

[Carl53]

We had a HELOC through our CU on our prior home. It was no cost to us for something like Prime minus 1% for 70% of what they appraised the house for. After about 5 years we used the HELOC to provide supplemental funds for the purchase of our replacement home that needed extensive renovations. We only paid the interest each month. Once we put the prior home on the market and closed on it the HELOC was paid off.

[tony17112acst]

I think with a HELOC, you will owe a balloon payment when it expires. The monthly payments (required) do not cover the loan!

With a HELOC, you may withdraw money only during the 1st so many years (maybe 10), then the balance is locked in. But the payments do not pay off the loan when it expires.

It's so far into the future, the balloon payment should not be a problem and you can always refinance again.

[Silk McCue]

I think with a HELOC, you will owe a balloon payment when it expires. The monthly payments (required) do not cover the loan!

That’s not the case that the OP describes and is not the case with ours from Third Federal. The balance at the end of 10 years can be amortized over another 20 years.

https://www.thirdfederal.com/borrowing/ ... d%20stress.

Cheers

[toddthebod]

How long is the 8% rate guaranteed on the HELOC? And how is the rate calculated once it can change?

My understanding is that the 8% rate is guaranteed for the life of the HELOC. And if rates fall within the first 10 years of the HELOC I can lock it into the lower rate for free (and now that new rate is guaranteed for the remaining life of the HELOC, unless I do it again at an even lower rate).

From the website:

Our home equity installment loan has a fixed rate. Our home equity line of credit has a variable rate which changes when the prime rate changes (as published in the money rates section of the Wall Street Journal). In addition, the home equity line of credit includes the option to convert all or a portion of your balance to the fixed rate option. (For more on this, see "What is the fixed rate option?")

And specifically on the HELOC:

With the fixed rate option, you can lock in a fixed rate on all or any portion of your variable balance at any time.

Any portion of the balance that is not converted into a fixed rate option will continue to have a variable rate and minimum payment in addition to the fixed rate payment.
You can have up to 3 fixed rate options in place at any time.

[PeninsulaPerson]

There is often confusion between home equity lines and home equity loans.

A world of difference in 2 letters.

Usually the full amount of a home equity loan has to be taken at once.

[tony17112acst]

I think with a HELOC, you will owe a balloon payment when it expires. The monthly payments (required) do not cover the loan!

That’s not the case that the OP describes and is not the case with ours from Third Federal. The balance at the end of 10 years can be amortized over another 20 years.

https://www.thirdfederal.com/borrowing/ ... d%20stress.

Cheers

I clicked on the link you provided and it doesn't say the balance is amortized for 20 years, it says that you make payments for 20 years.

[Silk McCue]

I think with a HELOC, you will owe a balloon payment when it expires. The monthly payments (required) do not cover the loan!

That’s not the case that the OP describes and is not the case with ours from Third Federal. The balance at the end of 10 years can be amortized over another 20 years.

https://www.thirdfederal.com/borrowing/ ... d%20stress.

Cheers

I clicked on the link you provided and it doesn't say the balance is amortized for 20 years, it says that you make payments for 20 years.

The “up to 20 additional years” on top of the original 10 year amortization reference makes it clear. The graphics make this clear as well.

Some newer home equity lines avoid payment shock by offering longer repayment periods and by amortizing, or repaying principal, during the draw period. The effect of these two changes can really help customers repay their loans in a much more comfortable fashion. For example, Third Federal’s new home equity line of credit offers a 10 year amortizing draw period where a portion of your principal is being paid and allows up to 20 additional years after the end of the draw period ends. This provides you up to 30 years to repay your loan, lowering your monthly payment by hundreds of dollars a month, resulting in some relieved stress. Take a look at the chart below.

Cheers

[tony17112acst]

I did read all that very carefully the first time and the wording does not guarantee that the loan will have a $0 balance when the loan expires.

The loan will have payments that vary over the 10 year draw period (based on total balance). Since you pay principle and interest during those draw-period payments, they can then freely say you'll be paying principle during the DRAW period. But then they re-amortize when you hit the lock-in period 10 years later. The question is in the 20-year lock-in period. They were careful to never tell you how that 20-year lock-in period is amortized. If it's amortized for 30 years and you pay only 20 years of payments, you'll have a balloon payment at the end of the 20 years.

Maybe I'm missing something; can you quote the section that tells us how the 20-year period is amortized? I couldn't find it, not even in the more detailed link they provide. If it's amortized for 20 year,s yes, it'll have a $0 balance at the end of the 20 years.

Thanks!
-Tony

[Silk McCue]

I did read all that very carefully the first time and the wording does not guarantee that the loan will have a $0 balance when the loan expires.

The loan will have payments that vary over the 10 year draw period (based on total balance). Since you pay principle and interest during those draw-period payments, they can then freely say you'll be paying principle during the DRAW period. But then they re-amortize when you hit the lock-in period 10 years later. The question is in the 20-year lock-in period. They were careful to never tell you how that 20-year lock-in period is amortized. If it's amortized for 30 years and you pay only 20 years of payments, you'll have a balloon payment at the end of the 20 years.

Maybe I'm missing something; can you quote the section that tells us how the 20-year period is amortized? I couldn't find it, not even in the more detailed link they provide. If it's amortized for 20 year,s yes, it'll have a $0 balance at the end of the 20 years.

Thanks!
-Tony

Third Federal’s new home equity line of credit offers a 10 year amortizing draw period where a portion of your principal is being paid and allows up to 20 additional years after the end of the draw period ends. This provides you up to 30 years to repay your loan, lowering your monthly payment by hundreds of dollars a month, resulting in some relieved stress

The bolded words are crystal clear. It will be paid off at 30 years unless paid off sooner.

Cheers

[tony17112acst]

When I read: "This provides you up to 30 years to repay your loan, lowering your monthly payment by hundreds of dollars a month, resulting in some relieved stress" ...it does NOT necessarily mean that you will have a $0 balance at the end of those 30 years if you make the minimum payments.

For example, If you owe $100,000 and you pay $1 per month for 30 years (360 months) you'll still owe a $99,640 balloon payment at the end of the 30 years. The bank can still make the true statement: "This provides you up to 30 years to repay your loan."

You can have a balloon payment and still say the words: "you have 30 years to repay your loan."

I've had 7-8 HELOCs and not one would have had the loan paid down to $0 at the end of the loan's lock-in period. That's why I 'd like to see proof that Third Federal amortizes their lock-in period for the 20 years. If they amortize for 30 years for example (making monthly payments smaller), then there'd be a balloon payment.

All they say is that they'll give you 20 years, they never state how it's amortized.

[dollars and sense]

Thanks everyone for the replies.

The 20-yr amortization payments after the initial 10 years was stated by the rep over the phone. I don't have it in writing. I assumed it ended with a $0 balance and not a balloon payment but I'm not certain. However, if that were the case (30 years from now) I don't anticipate a balloon payment being an issue. 30 years of lower monthly payments would be helpful.

My initial gut reaction is/was to keep things simple and avoid the HELOC. My previous understanding was that it was variable rate, but I'm now learning I can lock a portion (or all?) of the balance at fixed rate. And I should (?)... be able to lock in at a lower rate any time within the first 10 years at lower cost than refinancing a home equity loan. However, it still seems overly complicated and confusing for what I'm trying to do (refinance a lump sum to a lower rate). I have no intentions of pulling more money out later, but stuff happens, and maybe that's equivalent to an Emergency Fund cushion (and my Efund is a bit underfunded at the moment).

I do like the idea of amortized payments over 30 years with the HELOC vs. max 20 years with the home equity loan. And exploring HELOCs opens up more sources to shop the rate, as I was a bit cornered into US Bank as they were one of the few lenders that offered no closing cost fixed rate home equity loans (with 0.5% rate discount for having a US bank account).

As a side note, if I did choose to stick with a home equity loan, is now the time to refinance (lowers my fixed rate by 0.5 to 1%)? Or do I wait for further anticipated cuts at the end of 2024? Or are those anticipated cuts already priced into current mortgage rates so I should go for it now?

[chazas]

Our ThirdFederal Heloc rate floats with Prime minus 1.01% so currently 6.99%. We got prior to retiring and currently have no balance on it.

Cheers

Lucky. I'm looking for a HELOC and their rates in Virginia at this point appear to be prime minus .51. Still good but yours is definitely better.