Suze Orman confused me last night-HELOC

[KandiB47]

Did anybody watch the Suze Orman Show last night? A lady asked if she and her husband should pay down on a HELOC as an emergency fund instead of putting the money in a savings account. Suze ultimately said they should put the money in the HELOC because it will earn 8%

I guess I don't know much about HELOCs so I don't understand this. Could anybody tell me more?

We have a 80/20 loan on our house and 20% is a HELOC. We follow a basic Dave Ramsey plan. We are in baby step #2 (paying all debts off except the mortage) but we should be done with this step by the years end. We planned increasing our emergency fund to 6 months of living expenses and putting this in a high yield savings account.

Now I'm wondering if we should just start paying off the HELOC next instead. But if we had to use that money for an emergency wouldn't it be like taking out another loan?

I want to refinance our mortgage but feel stuck right now. 80% of the loan is fixed at 5.25% but only until 2010. The HELOC is at 11.75% and the payments cover interest only I've looked into refinancing with the VA but they told me we would need 10% down to refinance. We don't have extra money for closing costs, down payment, etc so we were just going to wait until we pay off our other debts and then save money for a down payment so we don't pay PMI. Any thoughts? Mortgages just confuse me

 

[Toby'sFriend]

How much is the balance on the HELOC?

 

[KandiB47]

I knew someone would ask this Our entire mortgage was $205,000 and the HELOC is about $45,000. Our home is appraised at $217,000.

 

[Toby'sFriend]

ok, well 11% is not that great of an interset rate.

What Suze Orman is more or less saying is that it is silly to put thousands of dollars into a Savings Account which will earn 5% interest --- and then leave a debt out there on which you are paying 11% interest. That is a pretty high rate.

So, it would be better to pay down the debt, and then if you had a major emergency during that time, you could always take out more money on the line of credit instead of out of an emergency fund.

You need to get as much of this paid a soon as possible and really look into some way to refinance into a fixed rate. Personally, I find the idea of that rate getting bumped up to around 11% after 2010 much scarier than having to pay PMI for a couple of years.

 

[patsal]

What she said was that they should pay off the HELOC first before putting $$ into savings because a basic savings account wouldn't yield them 8% interest, but paying down the HELOC would "save" them interest.

I believe your next step would be to pay down the HELOC so you wouldn't be paying out so much in interest. If you still have no savings you are right in assuming in an emergency you would need to dip into the HELOC again. If you can why not divide the $$ you can put on the HELOC and put half into savings and half on the HELOC or 1/3 in savings and 2/3 on the HELOC.

I have no debt except the mortgage and HELOC that I have. I am putting $500 extra in savings per month and $500 extra on the HELOC. In 10 months when I have the savings pumped up to a comfortable place then I will put the $1000 on the HELOC and be finished with that in 15 more months.

 

[KandiB47]

Okay that makes sense to me. Thank you. I have no idea how much PMI costs so I'm off to investigate.

 

[tedhowe]

As others have said, paying off the HELOC is going to "earn" you more interest (in the form of avoided interest payments) than any deposit account or CD ladder.

ALso, in terms of true short term emergency savings, the HELOC does act as an emergency funds source of sorts.

If you pay off the HELOC first, and then shift that extra money into emergency fund savings, you are on the right track.

If, during the time you are building up the emergency fund, you find that you truly need access to funds that you might have had in your emergency funds, you CAN draw on the HELOC. I would only do this if your "emergency" was reasonably expected to be short term, but in the end after the emergency is resolved, you'll be no worse off by taking this route.

Ted

 

[Diabolicdesire]

I did a 10/10/80 loan when I bought my house. The mortgage broker told me it was a smart thing to do so I could avoid PMI. My regular mortgage was fixed but my HELOC was not and steadly kept increasing each month. Plus it was interest only so it was in my opinion worse than PMI because after 30 years of paying on it I would still owe the full amount. I got a stock secured loan at 8% Int and payed it off in October. Atleast now my payment go toward the interest and will be payed off in 5 years.
I'm hoping to pull enough equity out of this house when we sell it to put down a full 20% on our next house.

 

[seashoreCM]

IPlus [the HELOC] was interest only so it was in my opinion worse than PMI because after 30 years of paying on it I would still owe the full amount. .

With any HELOC you can make bigger monthly payments and then it will get paid off, principal and all, in less time depending on how much bigger your payments are over the minimum payments required. Of course, if you decide to draw on it (that is what lines of credit are all about) then the balance will go up again.

Disney hints:
http://members.aol.com/ajaynejr/disney.htm

 

[rucrazy]

Suze Orman's a quack. Change the channel.

 

[Stein]

Helocs are a bit scary as most are adjustable and many need to requalified every year. If an emergency hit, like a job loss, you could have the loan called due at the very worst time.

PMI doesn't help you, but it really isn't all that expensive compared to higher interest, and a bargain if you consider the reduced risk compared to an annual qualifying adjustable second. If I had a second or HELOC, I would be extremely tempted to refi it all together, even if I had to pay PMI.

If I couldn't refi for some reason, I don't know if I would pay the HELOC of or build an emergency fund first, there are scary situations either way.

 

[rocky41102]

You could also look into doing a fixed rate Home Equity loan instead of a line of credit. Also, it's possible your home has increased in value, so you may be able to refinance and not need as much of a home equity line.

 

[tor]

You could also look into doing a fixed rate Home Equity loan instead of a line of credit. Also, it's possible your home has increased in value, so you may be able to refinance and not need as much of a home equity line.

I agree when we refinanced our house Fleet now BOA had a great no closing cost home equity loan wich is a fixed rate and term as opposed to the line of credit. Most banks offer a similiar option.