Finances

#1
Southern Illinois
I'm looking for some info from those of you out there that are wiz's with home finances, mortgages, HELOC's, etc.. I recently refinanced my home to a 10 year 3.5% fixed. Basically I knocked 3 years off and dropped my interest 3%. I will be saving a ton of money just by doing this and am excited about paying my home off sooner. Before refinancing I was paying extra every month to the tune of what amounted to one extra payment per year. With my new loan I will again be paying extra, which amounts to 2 extra payment per year.

During the loan process I was asked several times about adding on a HELOC at no extra cost but declined with both competing mortgage co's. I've done some research since then and am wondering if I erred in not doing that. I have more than enough equity in my home to cover a HELOC which I could then use to pay off my first mortgage. If I am understanding the process it seems that paying off the balance via a HELOC will save me even more money due to how the interest rates are calculated.

Is this true? Can someone explain this to me? Have you done exactly this? I've looked online for calculators that compare the two but haven't found any. I appreciate any help anyone can provide.
 
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#3
Houston, Texas
What kind of rate would you have received with the equity line? I haven't done what you are proposing to do with the equity line but in checking, I think the biggest obstacle would be if how much an adjustable rate equity line increases over time.

I had an equity line on the last house I owned (not for my current home) and used it for buying cars, upgrading the house, etc. but never to pay off the mortgage. I think it's a pretty good idea, though.
 
#4
Southern Illinois
What kind of rate would you have received with the equity line? I haven't done what you are proposing to do with the equity line but in checking, I think the biggest obstacle would be if how much an adjustable rate equity line increases over time.

I had an equity line on the last house I owned (not for my current home) and used it for buying cars, upgrading the house, etc. but never to pay off the mortgage. I think it's a pretty good idea, though.
I don't recall. I need to check on that. But If I am understanding correctly even if it was a percentage point or so higher it was still going to save you money. I think the mortgage interest is compounded whereas the HELOC was simple interest. I'm not a numbers person and this is all greek to me but I'm trying!:thumb:
 
#5
Ordained Dudeist Priest
Johns Creek, GA
I don't recall. I need to check on that. But If I am understanding correctly even if it was a percentage point or so higher it was still going to save you money. I think the mortgage interest is compounded whereas the HELOC was simple interest. I'm not a numbers person and this is all greek to me but I'm trying!:thumb:
That would shock the heck out of me. Typically equity lines are at a higher rate than a standard mortgage because they're in a higher risk position. If the borrower defaults the holder on the first is the first to get paid, and if the LTV is upside down the holder on the equity line is left holding the proverbial bag.

My guess is they were offering you the HELOC in addition to your standard in order to maximize your debt (yes, they do that, all day long). It wouldn't make sense for the lender to pay off your existing first with a HELOC unless it was already under 50% or so of your home value.
 
#6
Southern Illinois
That would shock the heck out of me. Typically equity lines are at a higher rate than a standard mortgage because they're in a higher risk position. If the borrower defaults the holder on the first is the first to get paid, and if the LTV is upside down the holder on the equity line is left holding the proverbial bag.

My guess is they were offering you the HELOC in addition to your standard in order to maximize your debt (yes, they do that, all day long). It wouldn't make sense for the lender to pay off your existing first with a HELOC unless it was already under 50% or so of your home value.
I'm better off then that, my equity in the house is right around 65-70%. Some of the sites/blogs online I was perusing over the weekend seemed to be saying it's still cheaper to use a HELOC, even at a higher rate. I'm just hoping one of these really super smart UI Finance grads can shed some light on this and help me understand if I'm misunderstanding or on the right track. I don't remember the exact sites I was on but they were all geared towards paying off your home very quickly.
 
#7
It wouldn't be a bad idea to have a HELOC for emergencies (you only pay interest on the amount you draw) or to pay down higher interest debt, which it sounds like you do not have, but don't think you can pay off your mortgage faster via a HELOC. The websites that were assuming you have a mortgage with compound interest are probably making a false assumption. Only you, or more likely your lender, would have the answer to that, and if it is simple interest, which I'm 99.9% sure it is, then there would be no difference if the APR were the same. However, with most HELOCs, the rates are variable and higher than a mortgage. You would have to ask your lender about the rates and how the interest is calculated on the HELOC (usually simple), too, to make a comparison.
 
#9
I'm looking for some info from those of you out there that are wiz's with home finances, mortgages, HELOC's, etc.. I recently refinanced my home to a 10 year 3.5% fixed. Basically I knocked 3 years off and dropped my interest 3%. I will be saving a ton of money just by doing this and am excited about paying my home off sooner. Before refinancing I was paying extra every month to the tune of what amounted to one extra payment per year. With my new loan I will again be paying extra, which amounts to 2 extra payment per year.

During the loan process I was asked several times about adding on a HELOC at no extra cost but declined with both competing mortgage co's. I've done some research since then and am wondering if I erred in not doing that. I have more than enough equity in my home to cover a HELOC which I could then use to pay off my first mortgage. If I am understanding the process it seems that paying off the balance via a HELOC will save me even more money due to how the interest rates are calculated.

Is this true? Can someone explain this to me? Have you done exactly this? I've looked online for calculators that compare the two but haven't found any. I appreciate any help anyone can provide.
Sorry that I missed this thread. 25 year mortgage veteran here. Having a 10 year fixed, you pay very little interest. If you are comfortable with this payment, then you should stop right there. Home Equity Lines of Credit have variable interest rates.

Now, if you have and use an emergency fund to pay down your heloc, after you open it, then your balance will drop significantly, and if you continue to make your normal payment, it will go away faster, since you have less principle. The bad thing about this strategy, what happens if 2008 occurs again and your line of credit gets frozen and you are in a position that you need that emergency fund? It is a small risk.

Opening a free heloc, is not a bad idea, just not to pay off your mortgage. Most helocs have a 2 year pre-payment penalty, but only if you close the account. You can keep it at a $0 balance, and leave it open. They usually do have an annual fee of $50 or so, usually waived for the first year.
 
#10
I'm better off then that, my equity in the house is right around 65-70%. Some of the sites/blogs online I was perusing over the weekend seemed to be saying it's still cheaper to use a HELOC, even at a higher rate. I'm just hoping one of these really super smart UI Finance grads can shed some light on this and help me understand if I'm misunderstanding or on the right track. I don't remember the exact sites I was on but they were all geared towards paying off your home very quickly.
I've seen some of those videos, they are "fuzzy" math. They make a number of assumptions. The heloc does give you flexibility, if that is important to you, however, you will pay more in the long run.
 
#11
Southern Illinois
Thanks for the input. I elected to stick with the mortgage as-is and have been paying at a 130% clip (930/1200) since my first payment. I think I have 6 payments in to date. I'm guessing/hoping that if I can stick with this amount for the length of the loan it will be paid off in 7-8 years. Does that sound correct? I'll probably go ahead and do the HELOC at some point just to have the flexibility.
 
#12
Southern Illinois
Another question. I have a 6 month expenses emergency cash fund. If I do the HELOC would I be better off taking that amount and paying down my principle since I can use the HELOC as my emergency fund?

Are there any real disadvantages to wanting to get my home paid off sooner rather then later? I know about the tax write off but that's not a real concern to me.
 
#13
The biggest advantage for not paying it off early is that it frees up cash for other purposes. 3.5% is almost free. I would look to putting your money elsewhere. Are you maximizing your retirement options? Are you contributing to a Roth IRA?

Another advantage of paying your loan off later is that you are paying with dollars that are worth less than they are now. Well, that is assuming we don't have deflation. You might also get a deal with the bank on their checking accounts if you have a mortgage with them. Those are the only advantages that come to mind.
 
#14
Thanks for the input. I elected to stick with the mortgage as-is and have been paying at a 130% clip (930/1200) since my first payment. I think I have 6 payments in to date. I'm guessing/hoping that if I can stick with this amount for the length of the loan it will be paid off in 7-8 years. Does that sound correct? I'll probably go ahead and do the HELOC at some point just to have the flexibility.
Based on the info provided, yes, 89 months to payoff. Regarding paying it off early, ILL_INI makes good points. When you do pay it off, don't forget to paint your front door red (old tradition). Regarding the emergency fund, I prefer the cash option versus the heloc option. One never knows the future, but getting a free heloc is a great buffer too!