Home Equity Line of Credit

At the moment, the only debt that our family has, aside from credit cards that we pay off in full every month, is the house. We owe about

40% on it and pay appx. 12% of our gross as mortgage.

However, I have a concern that if we lose jobs, or some such, that it would be good to have some extra liquidity.

So, from a while ago I remember that people were taking HELOC, or credit lines, using their homes as collateral.

So I essentially have these questions:

1) Can I take a HELOC and not use it for a couple of years 2) Does it cost anything to maintains a HELOC? 3) Do the banks have any weaseling clauses in the contract that would let them cancel this credit line in the event we lose our jobs?
Reply to
Igor Chudov
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I can speak to the rules for mine;

1) I needed to draw $50,000 at signing. I paid it back 2 days later, so a few dollars interest. 2) First year was free, $50/yr after. 3) It can. I sifted through every word of mine and the contract states they can freeze based on Loan to value. My 1st mortgage is less than 25% of home's value, so it would take a drop of more than half to still be at 50% LTV, I don't see that happening. No reference in contract to income. 10 year draw, then 20 yr payback. Joe
Reply to
JoeTaxpayer

Don't know about your particular bank, but I took out a large HELOC about 2 years ago to use as a bridge loan for a new house. Decided not to move, but kept the HELOC just in case. Didn't touch it ($0 cost) until last month when I used it to pay cash for a new car. It's interest rate was 3.5% lower than a new car loan. Easy, peasy.

Chip

Reply to
Chip

Chip, first thanks for helping to stimulate the economy by purchasing a new car. However, we have talked time and time again here that borrowing against your house for a depreciating asset such as a car is a very bad idea. And don't think that I don't understand the difference in interest rates, because I do. We have also advised against borrowing for car purchases. Frankly, it is all this borrowing that has gotten us into the economic difficulty we now find ourselves.

Elizabeth Richardson

Reply to
Elizabeth Richardson

Isn't there some mental accounting going on here? Borrowing is borrowing. From a pure net worth point of view, it doesn't matter what he uses to secure the loan. The car is depreciating anyway.

I know that borrowing against your house potentially puts your house at risk, but it sounds like he is getting well paid for assuming that risk. Assuming, of course, that his cash flow and net worth are in good shape.

I do agree with you that, if you can't pay cash for a new car, you should buy used. A rule I have violated several times.

-- Doug

Reply to
Douglas Johnson

And my house is not a depreciating asset? Checked home values and foreclosure rates in the Phoenix area recently?

I thank you for your good advice and in normal times I try to live by them. But these are not close to normal times. I needed a car, checked all other avenues of finance, including straight cash (which I have available) and decided that for my circumstances and my wife's peace of mind to go this way.

Not to get political, but I totally disagree that borrowing got us into this mess. It was greed, fraudulent in some cases, and lack of competent or any oversight that did it.

Chip

Chip

Reply to
Chip

I'd propose that the MIFP "best practice" be paying for your cars in cash, irrespective of whether you choose to buy used or new.

Doing so reinforces the point that a car is consumption, just like a computer, clothing, travel, or a 50" TV - which also drop in value starting from the minute you leave the store, and eventually are worth $0 or close to it. I think most would agree that you should pay for those things in cash, even if you can borrow the money at 2% on a home equity line of credit. So why not a car?

Like any rule there are exceptions, of course, but "I can get

0%/low-cost financing" is one to consider very carefully. The benefit of paying in cash is as much behavior-related as financial. I'd bet that 80%+ of people buying a car with cheap financing end up with a more expensive car than if they had to pay in cash. The cash buyer is much more likely to conclude "it isn't affordable" or "I want to spend my money on something else." Which is part of the reason dealers offer 0%/low-cost financing.

-Tad

Reply to
Tad Borek

We have discussed this before, too. Borrowing is just one of the things that got us into this mess, in addition to the reasons you state, plus some others. No argument from me there is plenty of blame to go around. There likely wouldn't be so many foreclosures now if people hadn't borrowed too much, whether it be for their houses, for their cars, or for other consumption via credit cards. Too much borrowing is definitely part of it, and our future economic woes will be further compounded by government borrowing.

Elizabeth Richardson

Reply to
Elizabeth Richardson

Absolutely. If you qualify. (which it appears you would be likely to do).

Some have a small annual fee. Some don't. If your credit is good, you should be able to find one with no annual fee and with a rate that's below prime (ie. prime - 0.50).

Nothing "weaseling" about it. If your credit deteriorates, they will freeze your line. Every one of them. Is there a reason they shouldn't reserve that right in their contract? It's not a fixed loan. It's a line of credit.

That said, your employer doesn't notify them that you've lost your job. They are generally going to monitor your credit report and FICO scores, but they are not going to call your boss and check that you're still there.

You're more likely to have your credit line frozen if, say, you start running up big credit card bills.

Several of us here have been saying - for years and well before the current credit crunch - that a HELOC is NOT an emergency fund, nor is it a substitute for one.

Reply to
BreadWithSpam

Tad Borek wrote

The above is my nominee for "Post of the Month."

The rule above surely also applies to those who seek no-down-payment home mortgages.

Reply to
honda.lioness

I could be, in an emergency.

Reply to
Chris Cowles

Chris Cowles Gainesville, FL

Hey, my old stomping grounds, graduated from UF in 68. Go Gators! To keep it on topic, how's the economy and health insurance doing in Fl? Chip

Reply to
Chip

My previous comment was meant to be "It could be...", not "I could be...".

On topic, UF has had some personnel layoff and is considering paring some undergraduate degrees. Construction projects are on hold, if not already contracted. They're holding the freshman class to a previous enrollment level. In general, we're affected here just as other places are but we don't have much production-type industry so not affected in that way.

Other signs:

The neighborhood next door to mine cleared a new area for building new single family homes. They started installation of underground utilities, but simply stopped. There's a new gravel access road as a result, and no activity for several months.

Several huge developments across University Ave from UF are simply dead. One was the corner of 13th and University, probably the most prime retail spot in the city. Several square blocks were leveled. Now it's a grass parking lot. Another is a high-rise (by Gainesville standards) that takes up half a square block across the street from the UF library. They build the concrete framework and now there's nothing but construction barricades blocking the sidewalk.

The guys who rented space in the downtown parking garage and detailed cars there are now gone. That's simply anecdotal but illustrates how the economy is affecting small businesses.

A new shopping center that opened before the collapse is doing okay, but they stole some tenants from the Publix shopping center across the street. Those spaces are still vacant, which is unusual in that location. It's a high-income area with limited retail space, so competition was high (as was rent) for the available space. No longer true.

Reply to
Chris Cowles

But doesn't UF crank out about 5000 grads/yr? If that isn't production what is.

I had thought of retiring back to Gainesville. How is the area for retirees now?

Chip

Reply to
Chip

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