It used to be that a lot of people went with the HEL or HELOC because the PMI was not tax-deductible but the mortgage interest was, but that has changed now. Now it's easier to just compare up front what each will cost you and go with the lowest cost (assuming you have a bank that will allow less than 20% equity; it is still possible, though harder than it used to be).
With PMI, you pay until you reach 20-22% equity (I understand a lot of them require 22% just to be safe) and usually for at least a minimum time, so you'll often have to pay for an assessment ($400-500) to determine the new loan-to-value ratio after a few years. With a HEL or HELOC, you just pay until it's paid off. When we bought the first time, we went with the HEL for our 2nd mortgage because it had a fixed interest rate (the HELOC options were all variable) and we also selected a shorter term since it was for a smaller amount so it didn't make that much difference to our bottom line. We ended up paying it off with our first re-finance.
Thanks. We're trying to figure out our options here and also which lender to go with
Lender 1 suggested HELOC and Lender 2 suggested paying off PMI upfront; those are the two considerations we are thinking of going with to keep the monthly payments at our ideal
My FIL basically scorned us for considering HELOC so I'm trying to understand its negatives more. Is the biggest negative that typically the 2nd loan has a variable rate?
The hunt itself is frustrating. We've seen about 10 places and ruled out over 60 online...there is one place in Congress Park we saw last weekend that I keep thinking about so we're going back again this wknd. The twist is that it's over budget but realtor thinks its way over priced and that we could put in offer in at our budget but then it's obviously hoping it gets accepted
HELOC advantages: interest is deductible interest rates are still fairly low right now and payments are interest only HELOCs are another line of credit you could use in the event of an emergency (assuming you've paid yours down)
HELOC disadvantages: It's secured by your home. But so's your primary mortgage, so it's not much different from that. The draw period is usually a shorter time frame than the maturation date (mine is 10 yrs vs. the 15 year maturity), so my pro #3 is not for the entire length of the period If you've paid your HELOC down but still want to use the line of credit, they can always freeze it if values degrade Interest is tied to Prime, typically, so it could get pretty high -- make sure you'd be comfortable with the interest payment if Prime skyrocketed for some reason It's on YOU to pay down principle -- there's a balloon payment at the end, so you either have to have it all paid off, secure a new one, or roll it into your primary mortgage There is usually a yearly fee for a HELOC -- between $50-$150/year. Sort of like the annual fee for a credit card.
The biggest issues with HELOCs are that if you don't pay them, you can lose your house. That's why people sometimes think they are irresponsible. But as a second mortgage, it's a great tool for getting rid of PMI. Think about it......
If you had a mortgage with PMI, you are paying upfront PMI to the tune of a few thousand dollars, you are paying interest on that extra 10% of your house for 30 years, and you are STILL going to lose your house if you don't pay.
With the HELOC, you don't have any upfront dollars that you just lose....you are only going to pay interest for however many years you take to pay it off.....you have the flexibility to adjust your payment every month to meet or exceed interest...... One refi a few years later can knock it out completely.
Can you tell this is the path I chose? And it was the right one, and it took a ton of convincing by my mortgage officer. 2 years later, and it's nearly paid off. There's NO WAY I'd ever pay my primary mortgage down as fast as I did the HELOC. It was a great decision for me.
; It's on YOU to pay down principle -- there's a balloon payment at the end, so you either have to have it all paid off, secure a new one, or roll it into your primary mortgage .;
Thanks for the info! Can you elaborate on this? So our monthly payment would be interest only and we'd want to pay extra for principal then?
; It's on YOU to pay down principle -- there's a balloon payment at the end, so you either have to have it all paid off, secure a new one, or roll it into your primary mortgage .;
Thanks for the info! Can you elaborate on this? So our monthly payment would be interest only and we'd want to pay extra for principal then?
I don't think all HELOC's are interest only and then end with balloon payments (though many do). But if yours does, you can just compute how much you need to pay to have it paid off at the end of the term and pay that amount.
I think the biggest reason not to get a HELOC is just the uncertainty over where prime rates might go, but if you can pay it off in a few years you might decide that's a risk worth taking.
Sorry house hunting has been frustrating! More things should come on the market in the next couple of months.
; It's on YOU to pay down principle -- there's a balloon payment at the end, so you either have to have it all paid off, secure a new one, or roll it into your primary mortgage .;
Thanks for the info! Can you elaborate on this? So our monthly payment would be interest only and we'd want to pay extra for principal then?
Your monthly payment would be interest only on the balance of the principal......and then you'd want to figure out how quickly you want to pay it down. If you are making massive improvements to the house and feel like you will refi in the next few years, then you might not want to reduce your principal at all. If your goal is to get rid of the HELOC as fast as possible, then stroke a check every month for as much as you can because it all goes towards principal after you pay interest.
For example, I think my starting HELOC balance was $33K. My interest payment every month was around $175. Even at the interest cap of 20% interest, the interest payment would never be something I couldn't pay given my budget, so I didn't really worry about higher interest over time. (I also had access to a forward Prime curve at the time and did a little forecast....calculated how much I wanted to pay every month on top of interest to get rid of it in under 5 years)
We didn't do it to avoid PMI so I'm not sure how those work when you are purchasing. The rules really have changed and are much tighter than they were before the crash. We have a heloc. Here local banks will lend 90% of the value on a heloc at prime + 1%. Our heloc is at prime (currently 3.25% or 3.5% I can't remember which) since we borrowed up to 80%. Ours is not interest only, although there are some. Our minimum payment is 2%of the outstanding balance and it's open for 20 years. So we will be able to borrow against it at prime for the next 20 years. Ours had no closing costs if we advanced $10,000. There was no requirement to keep that $10k for any period of time. We have a plan to pay it off quickly and wanted it open just for large home improvements.
Oh also, if you just do one mortgage: we were originally able to do a conventional loan with 5% down. We had a minimum of 12 months of paying PMI. We were doing a lot of cash renovations and would have been able to remove PMI with an appraisal 12 months after we purchased. Rates dropped quite a bit in that time, so we chose to refi instead.
HELOC operates like a credit cards - you pay interest based on the current balance and can with draw more if there is room on your allowable limit. Usually you need more than 20% equity in today's lending market before being allowed a HEL or HELOC - and must still have 20% equity AFTER the HEL/HELOC. I prefer a HEL (Home Equity LOAN - which operates like other loans with a fixed time and fixed interest rate)
You will not likely find anyone using this practice in this market.
Most want 20% down or FHA 3.5% with 30 year PMI (or you refinance later to a conventional loan) Many sellers do not want to deal with FHA.
We paid cash for our house, but took out a HEL for part of the renovations - wanting not to dip into other cash reserves. Paid it off in 4 years.
We have a HELOC but we didn't use it for down payment. We did it at the same time as the original mortgage just so we didn't have to bother with it later and can use it if we need it. We have used it periodically (and paid it off) for upgrades on our or the rental property.
HELOC operates like a credit cards - you pay interest based on the current balance and can with draw more if there is room on your allowable limit. Usually you need more than 20% equity in today's lending market before being allowed a HEL or HELOC - and must still have 20% equity AFTER the HEL/HELOC. I prefer a HEL (Home Equity LOAN - which operates like other loans with a fixed time and fixed interest rate)
You will not likely find anyone using this practice in this market.
Most want 20% down or FHA 3.5% with 30 year PMI (or you refinance later to a conventional loan) Many sellers do not want to deal with FHA.
We paid cash for our house, but took out a HEL for part of the renovations - wanting not to dip into other cash reserves. Paid it off in 4 years.
I would look to save 20% down.
Interesting. Our potential lender has reached out to use with the proposed use of HELOC to avoid PMI.
We will be purchasing without 20% down and are okay that
Post by lastnamejane on Jan 21, 2014 1:08:21 GMT -5
We purchased with 10 percent down and our lender offered the HELOC to avoid PMI. In our case we needed to hold two properties at once (buying before selling). We paid off the HELOC within 3 months of closing on our house with the proceeds from the sale of our condo. We now have it open with a zero balance. It really worked well for our situation.