Have a financial question...

[etwinchester]

What is the average % of the wall street prime rate or what is the most it has ever been?

I'm looking into getting a home equity line of credit. We want to consolidate some bills and do some major work around the house.

The one kind of loan you ask for a certain amount but don't have to take it all right away, you can take out what you need a little at a time - bad part it is a variable rate according to the prime. Right now for us it would be 8.24% but I don't know how much the prime goes up and don't want this HUGE payment.

The other loan is a fixed rate on the amount you take, but if you pay back and reborrow, that portion is a variable. Only thing is, we didn't want to take the full amount right away (ex: $25,000). We want to use $10,000 now and the rest around spring/summer when we start household things but do a little at a time. I'm thinking the fixed would be better though. I could take the full amount, use the $10,000 and pay the rest back, then reborrow as we need it at the variable rate.

Does this make sense? Which is the better option?

 

[keepinitreal]

Prime rate was 7.25% as of 1/1/06.

 

[bellarella]

History of the prime rate:

http://research.stlouisfed.org/fred2/data/PRIME.txt

 

[disneysteve]

I think the link bellarella gave is great for academic purposes, really interesting actually, but I'm not sure it helps answer the original question. The historical data really doesn't tell us anything about the future. Interest rates have been steadily climbing the past year or so. Many economists feel the Fed is done raising rates for right now. So a variable rate based on the prime probably won't change much between now and this summer. That may be the better deal at this point assuming it offers a favorable interest rate at this point.

 

[etwinchester]

Ok, if I went with a variable rate, my % would be the prime + 1% (for me now 8.25% and a discount if I have automatic deduction, making it 7.99%). I was told that it would NEVER exceed 18% but I still wouldn't want to be in the double digits that high.

I'm just afraid of doing it this way since the loan would obviously be for 10 years.

 

[disneysteve]

I'm just afraid of doing it this way since the loan would obviously be for 10 years.

I see the problem. I was just thinking of what the rate would be when you borrowed the money. If you anticipate taking most or all of that 10 years to repay, then the fixed rate may be the better way to go. At least that way, you know what you are getting into up front.

I'm not generally a fan of variable rate loans unless you expect to repay them in a relatively short time period. I'd rather pay a little more upfront but be locked in to a set payment rather than taking the gamble on the future rates.

 

[punkin]

The prime rate can conceivably go very, very high. There really is no ceiling. In the 1970s an 18% rate was common.

If inflation gets out of control, you have no idea what the Fed is going to do. No one can predict interest rates 10 years into the future (if you could, you wold be a billionaire). It all depends on the amount of risk you are willing to take.

A question...does the variable loan have some sort of cap on it? If it does not, you are exposing yourself to more interest rate risk than I personally would be willing to take.

Good luck with your decision.

 

[bellarella]

I think the link bellarella gave is great for academic purposes, really interesting actually, but I'm not sure it helps answer the original question. The historical data really doesn't tell us anything about the future. Interest rates have been steadily climbing the past year or so. Many economists feel the Fed is done raising rates for right now. So a variable rate based on the prime probably won't change much between now and this summer. That may be the better deal at this point assuming it offers a favorable interest rate at this point.

Yeah, I just quickly looked at the first part of her question and responded and didn't get a chance to read the "real" question.

I agree, the historical data doesn't tell you much. The fed does seem to be pegged to not raise rates that much more over the next year. Another factor to think about is the tax consequences. I believe the first scenario you are looking at is an equity line of credit and I don't believe any of that interest is tax deductible. The second one sounds closer to a second mortgage which would have deductible interest (though points have to be deducted over the life of the loan and not all at once). I'm sure DisneySteve can correct me on this.

I would definately not do the first option. Variable rates with that high of a ceiling (18% you mention) gives you significant exposure since you plan on paying it off over the life of the loan.

I'm not sure I understand your second option. Is there a reason you can't just take out one loan now for $10,000 and then take another one out in the spring? That would seem to make the most sense. Chances are interest rates won't be that much higher in a couple of months.

I wouldn't go for a variable unless it has a low cap. I think it would be better, if you have to, to take out the loan for the entire amount, stick the amount you don't need in a CD where it will earn some interest for those couple of months and keep the rate locked lower for the entire amount.

Good luck.

 

[PlutoPony]

We just went thru this exercise and found a wide variety of rates out there. We were only looking at lines of credit and those typically have variable rates tied to prime. The key for us turned out to be the margin or the amount over prime that we'd be paying since prime can vary. In the end we ended up with a margin of - .75% so we will pay under prime. The local credit union offered-1.0% but had restrictions on the amount we had to draw and when it was done, so bagged them. Obviously look at closing costs (no cost is common) and maintenance fees to keep the line open if it's not used (again we don't have any). Also is there a penalty for closing the account early, typically in 2-3 years? We got quotes thru Lending Tree and went from there. Closing was done via DHL - we just had to have some documents notarized.
HTH

 

[PlutoPony]

Interest from lines of credit are typically deductible on taxes. There's not a lot of difference in their tax treatment (as always consult a tax advisor - I'm not a CPA ).
We're starting out at 6.25% - so your 8.25% sounds high. Another idea is to refinance your house and take some equity out, then use that to pay for improvements, consolidate bills, etc. Since we're planning to pay our line off in 3-4 years, we didn't want to spread this cost out over 15 years in a refi of our mortagage. For some people however that may be another option. Do remember that this is essentially a 2nd mortgage on your house, and if you get behind and can't make payments it can cost you your house, just like defaulting on your 1st mortgage.....

 

[etwinchester]

Thanks. I did lock in on a fixed rate this morning for 8.35% for 7 years. I understand it being a second mortgage but the payments are cheaper than the bills combined that we are paying now. Some time down the road, we'd like to sell anyway. We have so much equity in our house and need to do some fixing up (windows, retaining wall, finish basement, etc). All of which will increase the value of our home.

I'm starting Real Estate school this year so having the lower payments right now will put our mind at ease. I won't have an income until I'm done and get things going, which you can't forsee. Any income I make, I will be putting 1/2 towards paying additional off the loan and remaining in our account.

 

[welovedis]

Just wanted to say good luck with the updates & school! Sounds like you opted for the better one long-term and you won't have to be so worried about the rate climbing.

 

[etwinchester]

Thanks. DH thinks we still could have gotten a better fixed rate but I really love the mortgage company we deal with (you feel comfortable since you know & trust them).

I don't know...hopefully I made the right decision...

If not, we do have 3 days to back out (buyers remorse)

 

[tor]

I believe the biggest pitfall is to avoid reloading the credit cards or whatever the debt was now that you reconsolidated it

 

[etwinchester]

I closed all the credit card accounts last year except for one and I froze the limit at $2,000, which I feel is a reasonable amount for emergencies (my rate on that card is fixed at 7.9%).

It does get you down knowing that it could take 10 years to get it all taken care of. Then again, it can be paid off sooner and 1/2 the loan is for fixing up the house and making it worth more and more presentable.

Guess Dave Ramsey wouldn't be too proud of this move but in a way, it does put me at ease with a smaller payment. We can always pay more on it but it's always easier said than done. Something usually comes up but as we pay back the loan, those funds become available again if we ever need it.