Good Time for a HELOC

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The Man with the Axe
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Good Time for a HELOC

Post by The Man with the Axe »

We just applied for a Home Equity Line of Credit. We have no intention of actually borrowing under the HELOC and we hope we will never need to use it. But in a pinch, the HELOC could extend the life of our emergency funds by as much as a couple of years. Under the circumstances, we think it is wise to secure all of our potential sources of liquid funds. We have a substantial amount of equity in our house – but that equity is not liquid. The HELOC would allow us to tap some of that equity as a last-resort source of cash.

Other than the hassle of un-freezing our credit and filling out the application form, there is no cost to establish the HELOC. Our friendly credit union will set it up gratis.

We wanted to expedite our application, while we know the employment verification phone call will be answered in the affirmative.
bloom2708
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Re: Good Time for a HELOC

Post by bloom2708 »

I'm not a big fan of an open HELOC for an Emergency.

If you both lost your jobs today, would you want to start borrowing money? That could make a bad situation worse. I think you would want to use it more when it is not an emergency.

I also think open HELOCs are opportunities to overspend. Well, we have the HELOC sitting there unused, let's go for that new XYZ toy or do that home remodel.

On the flip side, it probably won't do much harm if you don't use it. Your outstanding credit would go up. I think that could temporarily affect your credit score. But usage would be $0 (hopefully) so it should be minimal.

I would beef up your Emergency Fund over the next months over the HELOC, but take my answer with a grain of salt.

Hopefully a few others give their thoughts.
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JDCarpenter
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Re: Good Time for a HELOC

Post by JDCarpenter »

We opened one up in 2016 before retirement to have as emergency source of funds. A nice security blanket that easily exceeds a moderate year of spending. With all spending otherwise coming from IRAs, it would allow us to avoid taking a bigger tax hit if a major emergency comes up after our Roth Conversions for the year....
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watchnerd
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Re: Good Time for a HELOC

Post by watchnerd »

If you must.

But HELOC credit can be taken away, especially in a time of crisis and job loss.

I wouldn't feel real secure about relying on a safety net that can be yanked.

Get it for the short term. Long term, do better at beefing up your savings.

Paying interest while jobless = ewww.

Earning interest while jobless = better.
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The Man with the Axe
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Re: Good Time for a HELOC

Post by The Man with the Axe »

Approximately two months later. . .

The credit union opened our new HELOC this week. The lender's final phone call to verify employment took place just before they opened the account, approximately two months after we submitted the application.

As correctly noted by our friend watchnerd, it would be preferable to accumulate a large emergency fund. For most people, it would be unwise to regard a HELOC as the only (or even the primary) source for emergency cash.

On the other hand: Once the music stops (as it did in March), it is too late to think about increasing your savings rate. At that point, it is rational to evaluate exactly where you are financially, consider all your alternatives and, if necessary, take action to improve your position.

Hypothetically, the new HELOC would extend the useful life of our (already generous) emergency fund by a couple of years. We hope we never need to tap it, but the hassle involved in filing the application seems like a small price to pay in order to establish a couple of extra years of potential liquidity, to be used only as a last resort.

The HELOC cost us nothing. The credit union covered all the closing costs. We only pay a fee if we close the account during the first 36 months.

Our only regret: We should have set up the HELOC a couple of years ago, when we bought the house.
rascott
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Re: Good Time for a HELOC

Post by rascott »

I keep multiple HELOCs open (personal residence and rentals) with a CU. Typically zero balances, but occasionally tap when I need quick liquidity for something large and don't want to liquidate stocks. They cost me nothing annually to keep open. No brainer. Just don't let it be your only EF
bling
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Re: Good Time for a HELOC

Post by bling »

HELOCs are great for the added flexibility. if you need it, it's there. you don't, that's fine too. i got a prime - 0.75% HELOC before the pandemic, and with rates dropping my effective rate is 2.5% right now. so i'm paying 3 months of my mortgage in advance for a little bit of rate arbitrage.
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Re: Good Time for a HELOC

Post by seawolf21 »

bling wrote: Sat May 23, 2020 12:51 pm HELOCs are great for the added flexibility. if you need it, it's there. you don't, that's fine too. i got a prime - 0.75% HELOC before the pandemic, and with rates dropping my effective rate is 2.5% right now. so i'm paying 3 months of my mortgage in advance for a little bit of rate arbitrage.
Aren't you losing the tax deduction of the primary mortgage for doing this?
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Re: Good Time for a HELOC

Post by abuss368 »

We have had and used a Line of Credit whenever needed. We used to have one attached to the home but now simply have a personal line of credit. A little higher interest but the older I get the more I prefer to not have it attached to our home.
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Re: Good Time for a HELOC

Post by abuss368 »

Any line of credit can provide additional flexibility when needed. The preferred time to get one is when it is not needed.
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bling
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Re: Good Time for a HELOC

Post by bling »

seawolf21 wrote: Sat May 23, 2020 2:31 pm
bling wrote: Sat May 23, 2020 12:51 pm HELOCs are great for the added flexibility. if you need it, it's there. you don't, that's fine too. i got a prime - 0.75% HELOC before the pandemic, and with rates dropping my effective rate is 2.5% right now. so i'm paying 3 months of my mortgage in advance for a little bit of rate arbitrage.
Aren't you losing the tax deduction of the primary mortgage for doing this?
i'm not paying off my mortgage with my HELOC. i'm just "bunching" my extra principal payments and paying it all up front. this ever so slightly accelerates the amortization schedule and saves me interest, vs paying the extra principal monthly.
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nisiprius
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Re: Good Time for a HELOC

Post by nisiprius »

bling wrote: Sat May 23, 2020 12:51 pmHELOCs are great for the added flexibility. if you need it, it's there...
They weren't there when people needed them during the last financial crisis.
Some 122,000 borrowers with Countrywide home-equity lines of credit, or HELOCs, received letters in January [2008]. A few months later, thousands of customers of other major lenders -- including Bank of America, Chase, Citibank, SunTrust, USAA, Wachovia, Washington Mutual and Wells Fargo -- also received notice that their lines had been frozen or reduced.

It's a jolt to borrowers who have relied on their home-equity line as an emergency fund...
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seawolf21
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Re: Good Time for a HELOC

Post by seawolf21 »

bling wrote: Sat May 23, 2020 3:48 pm
seawolf21 wrote: Sat May 23, 2020 2:31 pm
bling wrote: Sat May 23, 2020 12:51 pm HELOCs are great for the added flexibility. if you need it, it's there. you don't, that's fine too. i got a prime - 0.75% HELOC before the pandemic, and with rates dropping my effective rate is 2.5% right now. so i'm paying 3 months of my mortgage in advance for a little bit of rate arbitrage.
Aren't you losing the tax deduction of the primary mortgage for doing this?
i'm not paying off my mortgage with my HELOC. i'm just "bunching" my extra principal payments and paying it all up front. this ever so slightly accelerates the amortization schedule and saves me interest, vs paying the extra principal monthly.
But are you immediately paying the HELOC balance off from this exercise? If not, you'll be assessed HELOC interest and that may no longer be deductible. I presume your the effective rate on your primary interest after tax deduction is still more than 2.5% (HELOC rate).
inverter
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Re: Good Time for a HELOC

Post by inverter »

In 2008, Bank of America who had the mortgage and HELOC on my parent's house ordered a snap appraisal in the middle of the recession and cut their line of credit by 2/3rds. :beer
Glockenspiel
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Re: Good Time for a HELOC

Post by Glockenspiel »

This helps me out with a question that I've been having with myself. We're looking at buying a new home within the next year, and I'm trying to figure out whether we'll have the cash to buy a house and sell a house at the same time, without knowing when the closing dates will be.

Does it make sense to open up a HELOC, with the thought that it could help with a down payment on a new home, in case the new home closes before my house being sold closes? Has anyone done this before?
wfrobinette
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Re: Good Time for a HELOC

Post by wfrobinette »

seawolf21 wrote: Wed May 27, 2020 9:56 am
bling wrote: Sat May 23, 2020 3:48 pm
seawolf21 wrote: Sat May 23, 2020 2:31 pm
bling wrote: Sat May 23, 2020 12:51 pm HELOCs are great for the added flexibility. if you need it, it's there. you don't, that's fine too. i got a prime - 0.75% HELOC before the pandemic, and with rates dropping my effective rate is 2.5% right now. so i'm paying 3 months of my mortgage in advance for a little bit of rate arbitrage.
Aren't you losing the tax deduction of the primary mortgage for doing this?
i'm not paying off my mortgage with my HELOC. i'm just "bunching" my extra principal payments and paying it all up front. this ever so slightly accelerates the amortization schedule and saves me interest, vs paying the extra principal monthly.
But are you immediately paying the HELOC balance off from this exercise? If not, you'll be assessed HELOC interest and that may no longer be deductible. I presume your the effective rate on your primary interest after tax deduction is still more than 2.5% (HELOC rate).
You're assuming he's even itemizing. Most us no longer do that since Salt reduction and the standard moving up.
wfrobinette
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Re: Good Time for a HELOC

Post by wfrobinette »

Glockenspiel wrote: Wed May 27, 2020 11:00 am This helps me out with a question that I've been having with myself. We're looking at buying a new home within the next year, and I'm trying to figure out whether we'll have the cash to buy a house and sell a house at the same time, without knowing when the closing dates will be.

Does it make sense to open up a HELOC, with the thought that it could help with a down payment on a new home, in case the new home closes before my house being sold closes? Has anyone done this before?
Most people buy and sell at the same. I'd look at a bridge loan as they are designed for this purpose.

Your bigger hurdle is going to be whether you'll be underwritten to carry both mortgages.
bling
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Re: Good Time for a HELOC

Post by bling »

seawolf21 wrote: Wed May 27, 2020 9:56 am
bling wrote: Sat May 23, 2020 3:48 pm
seawolf21 wrote: Sat May 23, 2020 2:31 pm
bling wrote: Sat May 23, 2020 12:51 pm HELOCs are great for the added flexibility. if you need it, it's there. you don't, that's fine too. i got a prime - 0.75% HELOC before the pandemic, and with rates dropping my effective rate is 2.5% right now. so i'm paying 3 months of my mortgage in advance for a little bit of rate arbitrage.
Aren't you losing the tax deduction of the primary mortgage for doing this?
i'm not paying off my mortgage with my HELOC. i'm just "bunching" my extra principal payments and paying it all up front. this ever so slightly accelerates the amortization schedule and saves me interest, vs paying the extra principal monthly.
But are you immediately paying the HELOC balance off from this exercise? If not, you'll be assessed HELOC interest and that may no longer be deductible. I presume your the effective rate on your primary interest after tax deduction is still more than 2.5% (HELOC rate).
yea, unfortunately the interest is not deductible. admittedly with only 3 months at a time the overall savings is very small, but i'm a tinkerer and this lets me tinker. if i wanted bigger savings i could bunch a year in advance and pay it off over 12 months, but that is also way more risky because the prime rate could go back up, my income stream could be disrupted, etc.
Hubris
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Re: Good Time for a HELOC

Post by Hubris »

Glockenspiel wrote: Wed May 27, 2020 11:00 am This helps me out with a question that I've been having with myself. We're looking at buying a new home within the next year, and I'm trying to figure out whether we'll have the cash to buy a house and sell a house at the same time, without knowing when the closing dates will be.

Does it make sense to open up a HELOC, with the thought that it could help with a down payment on a new home, in case the new home closes before my house being sold closes? Has anyone done this before?
We just did this and it worked well for us. Opened the no fee HELOC on our existing paid off house, and used the HELOC to make an all cash offer on the house we wanted to buy. Without an all cash offer on the new home, we wouldn’t have been competitive buyers. We did pull some funds from our investment portfolio as the HELOC wasn’t sufficient to cover the entire purchase price but we had these funds in fixed income. Without the a HELOC, we would have needed to pull funds from equities at a bad time, selling low.

The first home will go to closing today and the HELOC will of course be paid off as part of the process, so we’ll have incurred a few thousand dollars in interest to get this all done. The key for us was that our former house was in a high demand/low supply neighborhood and city.
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Re: Good Time for a HELOC

Post by Glockenspiel »

Hubris wrote: Thu May 28, 2020 8:28 am
Glockenspiel wrote: Wed May 27, 2020 11:00 am This helps me out with a question that I've been having with myself. We're looking at buying a new home within the next year, and I'm trying to figure out whether we'll have the cash to buy a house and sell a house at the same time, without knowing when the closing dates will be.

Does it make sense to open up a HELOC, with the thought that it could help with a down payment on a new home, in case the new home closes before my house being sold closes? Has anyone done this before?
We just did this and it worked well for us. Opened the no fee HELOC on our existing paid off house, and used the HELOC to make an all cash offer on the house we wanted to buy. Without an all cash offer on the new home, we wouldn’t have been competitive buyers. We did pull some funds from our investment portfolio as the HELOC wasn’t sufficient to cover the entire purchase price but we had these funds in fixed income. Without the a HELOC, we would have needed to pull funds from equities at a bad time, selling low.

The first home will go to closing today and the HELOC will of course be paid off as part of the process, so we’ll have incurred a few thousand dollars in interest to get this all done. The key for us was that our former house was in a high demand/low supply neighborhood and city.
Thanks for this input. I'm going to look at opening a HELOC at my credit union. With low or no fees, I think it would be great to have that flexibility when we buy our new home.
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Re: Good Time for a HELOC

Post by xerxes101 »

nisiprius wrote: Sat May 23, 2020 4:04 pm Some 122,000 borrowers with Countrywide home-equity lines of credit, or HELOCs, received letters in January [2008]. A few months later, thousands of customers of other major lenders -- including Bank of America, Chase, Citibank, SunTrust, USAA, Wachovia, Washington Mutual and Wells Fargo -- also received notice that their lines had been frozen or reduced.

It's a jolt to borrowers who have relied on their home-equity line as an emergency fund...
You can add US Bank to that list. I was one of those borrowers. It was a nightmare to deal with and to this date I do not want to do any business with US Bank, because they refused to return the credit line back to what it was years after the recovery with substantial home equity.

Of course I believe there are ways one could mitigate the risk of such a freeze: viewtopic.php?t=315367
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