Need some information re: HELOC

[NastyWoman]

Like a semi good YM-er I want to do some work on my condo but don't really want to use my cash to pay for it.  So I am considering getting a HELOC (mortgage is paid off -> I DID say semi good).  However, I have no clue how to go about this.  Where should I start looking?  Which terms should I watch out for? Etc., etc., etc.

[Bonny]

I'd start where I bank.

How much money are you going to borrow? How long do plan on paying it off?

HELOCs tend to be some of the cheapest loans but they are typically variable interest rates. If you're going take a while to pay and it's a large enough amount it might be wiser to refinance vs a HELOC.

[HoneyBBQ]

Dec 3, 2014 21:10:19 GMT -5 NastyWoman said:

Like a semi good YM-er I want to do some work on my condo but don't really want to use my cash to pay for it. 

Why?

[NastyWoman]

Interest rates are low and we should not cash for anything but investing (per Phil).  In case I was not clear, I did not want to imply that I want avoid paying for my remodel.

Bonny wouldn't I need to have a mortgage to be able to refinance?

[Tiny]

Dec 4, 2014 23:47:44 GMT -5 NastyWoman said:

Interest rates are low and we should not cash for anything but investing (per Phil).  In case I was not clear, I did not want to imply that I want avoid paying for my remodel.

Bonny wouldn't I need to have a mortgage to be able to refinance?

No.  well, not exactly. If you own your house free and clear you could simply get new first mortgage on it (refinance it). 

It really depends on how much money you need, how long you plan to take to pay it off, and how much your home is worth (50K condo? or 500K house).

A HELOC usually has some limit (typically 50K or more).   I like to use a HELOC (I've had them with 25K and 30K limits - because my primary home isn't very expensive.) because I tend to use 10K to 20K at a time, pay it down or off, and then start over again.  I can use the unused money as a kind of 'EF' if I needed to... because as Bonny pointed out it's an inexpensive source of money.

When my house was paid off  (no HELOC) and I realized I wasn't going to get a loan on the investment properties I was looking at... I opened a 100K HELOC on my 'paid for house'.   I used that to pay for the new Slum investment property and then re-fi'd the HELOC into a 30 year fixed mortgage.  I waited a year and then opened a new 30K HELOC on my primary property - just so I have some available $$ if I need it.  So, yeah, I had a paid for house that's now mortgaged to max the bank(s) would allow    I can't decide if I'm a bad YMer (took loans) or good YMer (took low interest loans to purchase income property)

At some point in the future I may be using part of my 30K HELOC to do a down payment on another inexpensive Slum. 

My current HELOC is 'interest only' for 10 years at which point it becomes a 'fixed rate' 10 year loan and I would start making bigger payments.   Back in the day my other HELOCs where "interest only" for 10 years and at that point I owed the ENTIRE BALANCE (ie a balloon payment).   A good YMer is already familiar with the concept an budgeting needed to pay debts off before the 'fit hits the shan' so once you know how your HELOC works you can set up an appropriate payment plan.

I don't think I've ever just paid the interest (the amount due) on a HELOC.... I've always had some $$ amount set up in budget as a payment.

As far as I can tell - there aren't any "tricks or traps" with a HELOC - at least not for YMer... (unless you seriously think you can only make the minimum payment indefinitely and are unaware of the balloon payment or the ten year fixed payment pay back period.)   

I'd get a guestimate for how much $$ you need for the fix up/remodel and then add in another 10K or more to come up with how much you should open the line of credit for.    Oh, yeah, you may only be able to get 70% of the value of your home in a line of credit - so 70K on a property that appraises at 100K. 

You may need to pay for an appraisal, and there may be closing fees or document fees.  You are basically re-mortgaging your paid for house.  

ADDED:  I was offered HELOCs with a yearly fee (typically $50 or $75 a year)  those had a slightly lower interest rate.  I took a HELOC with no yearly fee, no closing costs, I paid $150  for an appraisal (which I then also used to contest my property taxes!!!) and a slightly higher variable interest rate.  I expect to use the HELOC for short term 'loans'  with spells of $0 in between so the slightly higher interest rate and the $150 seemed like a better long term plan.   Sure enough 6 months after I opened the line - they offered me an 18 month teaser rate of 2.9%  on new charges - which coincided nicely with the work I had started doing - so I pulled the 5K I needed and will pay it off slowly while it's at 2.9%  

If you aren't sure how much $$ you will need for your remodel fix ups you can just open a really big HELOC (like I did) and then use the money as you go along and then decide later if it's better to do a re-fi into a 15 or 30 year new first mortgage.   I'm sure we're coming to the end of the really low interest rates so you probably want to plan accordingly.

[NastyWoman]

Thanks Tiny.  Even though I have a condo, in this VHCOL it is worth ~$400k.  I really don't plan on taking out much. I was thinking in the $30-$40k range. So maybe $50k to be sure? I want to pay that off in less than 5 yr. Big step for me since I am very debt adverse and closing in on retirement --- it has  to be paid off before then, never mind what Phil says 

[Bonny]

Excellent post Tiny!

[Bonny]

Dec 5, 2014 2:50:21 GMT -5 NastyWoman said:

Thanks Tiny.  Even though I have a condo, in this VHCOL it is worth ~$400k.  I really don't plan on taking out much. I was thinking in the $30-$40k range. So maybe $50k to be sure? I want to pay that off in less than 5 yr. Big step for me since I am very debt adverse and closing in on retirement --- it has  to be paid off before then, never mind what Phil says 

If you have a good pension; e.g. government or big company and a long projected retirement, a low cost mortgage may be the way to go. I've encourage MIL to keep her < 4% mortgage rather than pre pay or pay off. It's been a really smart move for her.

[Bonny]

I was thinking about this some more and wanted to add that the biggest risk I see with the HELOC situation is that it's easy to get sucked into paying for consumer improvements long after their useful life. For example, most buyers will consider many kitchens and baths "dated" if they are more than 10 years old.

And don't confuse "renovation" with "investment". It's rare to even recover your full renovation cost within the first year. And it goes down hill from there.

[NastyWoman]

Bonny, I need to replace the shower tub it has tiny cracks and some other needed work needs to be done.  I do not see this as an investment and won't end up with a 5 star bathroom, just one in which I can use more than just the toilet  .