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 savings.
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?
All good.
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 emergency fund.
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:
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