Okay, we have a median price single family home in the suburbs with
first mortgage paid off, and a home equity Line of Credit ($40,000) that
expires April 2013. This is according to original contract in 2003 when
the account was opened, there was a ten year life span. The LOC has
balance of a few hundred dollars right now.
We are married couple in late 50's, not rich but have retirement savings
and some Roth IRA's, generous emergency fund, plus paid off house. One
still working full time and one working part time.
My question is, since we want to still have an equity line for
"emergency" purposes, should we apply for a new line at our credit union
now, before the old one expires, or wait until after the old one expires
to apply for new one? I expect our credit scores to be high 700's or
800, so does closing the old home equity loan before opening the new one
make a difference in the credit score?
We also have a handful of long-open credit card accounts, many years of
credit history, and no significant debt other than co-signing for
student loans for one of our adult sons, who pays interest only on the
loan for now.
Nice. Of course, I'm not generally encouraging folks in the peak of
their earning years to pay off homes right now while mortgages are at
historic lows. But it sure makes for a nice monthly cash-flow picture
not to have to pay a mortgage and should let you really crank up the
Typical HELOCs have a "draw" period - often ten years - wherein you may
pull money (or pay back) at will. Then they go into a "payoff" period
- at which time you no longer may draw money from it, and minimum
payments cease being interest-only but now start amortizing out the
principal. The paydown period may be another ten years, for example.
You should figure out if that's the case, and know the terms. Are you
just nearing the end of the draw period or are you near the end of the
entire HELOC life?
I say this every time I hear that. A HELOC is NOT an emergency fund.
Just when an emergency hits may be exactly when the banks may crack
down and shut off your ability to draw from it. Historically, it
hasn't been a common occurance, especially for folks who have plenty of
equity in their homes. But it's still the case that a HELOC is not an
That said, I think they're great to have available if you have no major
ongoing costs associated with them. They can be an vehicle for quick
cash for things like replacing a roof or heating system, or even for
home upgrades like a remodel.
Talk to a mortgage guy. Chances are that the terms of the new one will
include closing down the old one as part of the closing process. The
new HELOC doesn't want to be subordinate to someone else's claims.
Again, talk to a mortgage guy. Chances are you won't have both old and
new HELOCs open at the same time, so it's a non-issue.
Review your credit cards. If the terms are good, keep a couple of the
oldest ones, but you really don't need a lot of them available or open.
If you're concerned about getting approved for the loan (and it sounds
like you have no reason to be), explore your FICA score and possibly
even sign up, temporarily, for one of the services where you can
monitor it. Too many credit cards open are a mixed blessing - if you
have low balances, your credit utilization ratio is low (ie. you are
not near your limits anywhere) and that's good. But if you have too
much available credit, another creditor may be hesitant to add more
available credit. The latter problem may be fixed without closing
accounts by simply asking the creditors to lower your limits. Credit
card companies usually will lower your limit with just a phone call if
you want. There are a lot of variables, and the true secret sauce to
how they formulate your credit score is just that - proprietary secrets
- so don't expect anyone to be able to tell you precisely what effect
one or another change will have on them.
You'll find lots of great information about credit scores over at myfico.com:
David S. Meyers, CFP®
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