Taking a home equity line of credit?

[leebee]

We just received an offer for a home equity line of credit from our mortgage holder (TD Bank- interest is adjustable APR set at prime plus .5%). We have a credit rating in the upper 700s/low 800s, and always pay our bills on time. We don't have a super-huge savings account (cover 6 months mortgage, utilities, insurance). Our only outstanding debt is a loan on the used minivan with about 16 months left to pay ($250 a month). We are considering the home equity line for the following reasons:

DD is a college junior and will graduate with about $22K in loans. We were never in a position to save much for college, so decided that we'd pay her loans. The LOC is at a slightly lower interest rate than her loans. Loans offer a 6 month grace period post-graduation, w/deferment if qualified.

We could pay off the minivan loan. Not a huge debt left, but once again the current interest rate is higher than that offered on the line of credit.

We have some major repairs on our home that will make living here more comfortable and more affordable, and eventually will need to be done anyhow. Replacing the windows will save us in oil (we had 5 windows replaced this fall for $2000 and the difference in temperature in those rooms is amazing!). We also need to repair our front porch and deck- they are really becoming decrepit and dangerous in some places. We can do this ourselves (started it last fall, actually!).

The payment on the loan range we are considering is $98-$155 a month. This LOC has a longer repayment period than the van (8 years vs. 1.5 years), but at least I KNOW we can more than afford the payments, and would strive to pay it off sooner. Also, it's a shorter repayment period than the 10 years for college loans, and the interest is tax deductible. The terms also say there's a $99 origination fee and a fee of up to $450 if it's paid off in less than 24 months (so we'd make sure not to pay it off that quickly… hahaha, like we could!).

SO… what am I missing? I know, I KNOW, everyone here is opposed to long term debt, so please, don't tell me not to do this because debt is "bad." When used responsibly, debt is just a tool, and honestly, this is where we are financially. I am not necessarily financially-savvy, so don't really know what we might be getting into. It looks good on the surface… but what else should we consider before taking this plunge?

 

[Nayan]

Adjustable. Never go adjustable, always go fixed. Interest rates are going up and that means your ARM payments will go up as well.

 

[Dacky619]

Adjustable. Never go adjustable, always go fixed. Interest rates are going up and that means your ARM payments will go up as well.

I agree with this. Unless you have the liquid assets to pay off the loan if needed, get a fixed rate loan and compare that to your current loans. Yes the rate might be less than your van and the student loans, but they won't stay that way.

 

[leebee]

Adjustable. Never go adjustable, always go fixed. Interest rates are going up and that means your ARM payments will go up as well.

I agree with this. Unless you have the liquid assets to pay off the loan if needed, get a fixed rate loan and compare that to your current loans. Yes the rate might be less than your van and the student loans, but they won't stay that way.

Thank you both so much! This is EXACTLY why I wanted input… because you are correct. I never thought about the "adjustable" part of the rate; I was caught up in the manageability of the loan and being able to take care of some things. We NEVER take adjustable rates for anything, and it just slipped by me here. Hmmm… I wonder if the bank will talk about a fixed loan, or if they'll cap this offer… something to consider. Thanks again!

 

[Colleen27]

Personally I wouldn't roll the student loans into a HELOC. You can make your DD's student loan payments without making the debt your own, much less putting your house as collateral against it. Student loan interest is deductible too, so unless there's a big difference in the interest rate paying those loans with your home equity is a risk without any reward.

 

[littleelf]

If you can get a fixed rate, I would consider doing this especially since you plan to help your DD pay off her loans. My kids aren't in college yet but I work with so many people who have overwhelming undergrad and grad school loans and it is putting them so far behind where I was at that age I feel like they will never be able to do "grown-up" things like buying a house. Unless you are going into a career where you know you will make a lot of money, school loans are a killer! I work at a non-profit--no one is getting rich working there and so many are struggling due to student loans. Even DH, who is a lawyer, would have problems paying student loans if he had them because he works in family law and gets paid primarily as a law guardian by the state--not bad money but not the big bucks most associate with attorneys.

I hate the idea of student loans!

 

[goingtowdwwithkiddos]

For sure no to an ARM and I am not a big fan of borrowing against your home EVER. I did mortgage collections, and now give home values to the banks, Sooooo many people who could have their homes paid off are now in foreclosure. I think it is a domino effect and they had GOOD intentions but really not the best place to go for money IMO. I do agree keeping the student loans as student loans, as for the others save to pay in advance and you have no interest, or tackle 1 project at a time with smaller loans paid off fast. Just do not risk the house you do not always know the future.

 

[leebee]

If you can get a fixed rate, I would consider doing this especially since you plan to help your DD pay off her loans… Unless you are going into a career where you know you will make a lot of money, school loans are a killer! I hate the idea of student loans!

HAHAHA DD is a double major in English and creative writing with a double minor in dance and psychology. She's also working on getting teaching credentials. Go into a career where she'll make a lot of money? Not gonna happen. We are, however, extremely proud of her for her 3.7 GPA, being the VP-Academics in her sorority, and her position as a soloist and contributing artist with the local ballet company! In addition to being an amazing, wonderful daughter!

It'll all work out. I just keep thinking that I'm gonna be able to afford to live like a grown-up someday, but I'm pushing 60 and it's just not happening...

 

[loveshak22]

I agree with your comment that debt is typically not a good thing but can be when used wisely. I think that most people get in trouble when they take out money just because it's offered to them with no real plan and no real understanding of how hard a long-term loan can be to pay off.

However, if you have a set plan and are fully aware that this is a long-term debt that you are taking on then I think only you can determine if it's advantageous to your needs. It sounds like the house projects are needed and, in the end, will improve your original investment - the house. Plus it will make your house more energy efficient saving money. Also if you have 16 months paying the mini-van off at $250 a month and you are able to afford that and your option is to get a home equity loan at about $250 a month to accomplish your other goals then you know you can afford the payment. It will just last a lot longer and you are obviously aware of that.

I agree that a fixed rate is definitely the way to go. I hate ARMs but we have used them in the past and then paid them off when we were able to refinance the house once we had enough equity in the house to do that. Also, if you could put extra money towards principle, and make that a concerted effort, then you could work to pay it off quicker.

Do you have enough equity in the house to refinance instead of a home equity loan??

 

[DetroitDisney]

ARMS are not bad. ARMS taken for the wrong reasons CAN hurt people if they are unaware of WHY to take an ARM.

If you roll everything into an ARM/HELOC and use the additional money you save per month to actively pay more to principal every month, then you will end off ahead of the game. If you are just using the ARM to get a lower payment, then I would avoid it.

 

[mom2rose&john]

I would talk it over with the bank you have your mortgage with. Depending on your current interest rate on your mortgage it may be better to refi with a cash out for the home improvements and student loan. I agree and would not do an ARM if you can do fixed. But there are also advantages to HELOCs for some so I wouldn't totally rule it out until you discuss with a loan officer. There are so many variables to your question because it all relates to the amount of money you need, what your current interest rate is and what the costs are associated with certain loans. Bankrate . com has some very good information and calculators that will help you with helocs, refi's and fixed rate home equity loans.

 

[mhfrau]

Personally I wouldn't roll the student loans into a HELOC. You can make your DD's student loan payments without making the debt your own, much less putting your house as collateral against it. Student loan interest is deductible too, so unless there's a big difference in the interest rate paying those loans with your home equity is a risk without any reward.

This. We plan on paying a portion of whatever loans our son has too, but I would not do it by a line of credit on my house. Even if I could get a fixed rate. But for the needed repairs, I would do a fixed rate. That is a whole other ball of wax.

 

[DVCcurious]

Adjustable. Never go adjustable, always go fixed. Interest rates are going up and that means your ARM payments will go up as well.

This is incorrect.

Interest rates are not going up beyond maybe another .5% for a very, very long time. 30 year mortgages won't see 5% for at least 5 years and probably as long as 10.

HELOCs are about 4.5%. If you can get a fixed for 5% or less then go with a fixed, but if they want 6% fixed then don't do it. HELOCs won't see 6% for 10 years or more.

I know everybody says "interest rates have nowhere to go but up" but people have been saying that since 2008. That's 6 years ago! SIX!

Janet Yellen is not going to change Fed policy. If liquidity is taken away then we will be back in recession. We have the worst employment rate of the past 30 years right now. There are fewer people working today then at any time since the late 70s. I know the TV news tells you the unemployment rate is dropping, but what they don't tell you is that it is only dropping because of people leaving the labor force.

If unemployment under Obama was measured the same way it was when Bush was president we'd have a 10.5% unemployment rate (source: Huffington Post so you know this isn't a right-wing lie).

Interest rates will not increase. The Fed can't allow rates to rise and shove us back into recession. Go with a floating HELOC and save some cash.

 

[JillyBean1899]

... I work with so many people who have overwhelming undergrad and grad school loans and it is putting them so far behind where I was at that age I feel like they will never be able to do "grown-up" things like buying a house. Unless you are going into a career where you know you will make a lot of money, school loans are a killer! I work at a non-profit--no one is getting rich working there and so many are struggling due to student loans. Even DH, who is a lawyer, would have problems paying student loans if he had them because he works in family law and gets paid primarily as a law guardian by the state--not bad money but not the big bucks most associate with attorneys.

I hate the idea of student loans!

Like any debt, they can be a useful tool. I will be graduating with a Bachelor's in Accounting and a minor in Hospitality (possibly a Master's in Accounting, not sure yet how far I want to go), and will have less than $25,000 in loans (Stafford Subsidized only, so fixed rates and no accumulating interest) when I receive my BSBA. Considering I can realistically expect to make $45-50k/year within the first 5 years after graduation, I don't see that as a huge amount of debt, nor do I see my future income as "a lot of money". Even if I get additional loans to cover my Master's, that would still put me under $50,000 for a loan total, and I'd most likely just finish my Bachelor's and then get a job at a company that had tuition reimbursement, and use that to help finance my Master's.

In our loan orientation, the presenter said that a good rule of thumb is to not take out loans totaling more than what you can realistically expect to be making within 5 years of graduation. Granted, the economy is wonky right now, so it's hard to estimate that, but even still, it should be pretty obvious that racking up $150k in debt for a job where you would be making $25k/year isn't a good idea.

 

[tvguy]

We just received an offer for a home equity line of credit from our mortgage holder (TD Bank- interest is adjustable APR set at prime plus .5%). We have a credit rating in the upper 700s/low 800s, and always pay our bills on time. We don't have a super-huge savings account (cover 6 months mortgage, utilities, insurance). Our only outstanding debt is a loan on the used minivan with about 16 months left to pay ($250 a month). We are considering the home equity line for the following reasons:

DD is a college junior and will graduate with about $22K in loans. We were never in a position to save much for college, so decided that we'd pay her loans. The LOC is at a slightly lower interest rate than her loans. Loans offer a 6 month grace period post-graduation, w/deferment if qualified.

We could pay off the minivan loan. Not a huge debt left, but once again the current interest rate is higher than that offered on the line of credit.

We have some major repairs on our home that will make living here more comfortable and more affordable, and eventually will need to be done anyhow. Replacing the windows will save us in oil (we had 5 windows replaced this fall for $2000 and the difference in temperature in those rooms is amazing!). We also need to repair our front porch and deck- they are really becoming decrepit and dangerous in some places. We can do this ourselves (started it last fall, actually!).

The payment on the loan range we are considering is $98-$155 a month. This LOC has a longer repayment period than the van (8 years vs. 1.5 years), but at least I KNOW we can more than afford the payments, and would strive to pay it off sooner. Also, it's a shorter repayment period than the 10 years for college loans, and the interest is tax deductible. The terms also say there's a $99 origination fee and a fee of up to $450 if it's paid off in less than 24 months (so we'd make sure not to pay it off that quickly… hahaha, like we could!).

SO… what am I missing? I know, I KNOW, everyone here is opposed to long term debt, so please, don't tell me not to do this because debt is "bad." When used responsibly, debt is just a tool, and honestly, this is where we are financially. I am not necessarily financially-savvy, so don't really know what we might be getting into. It looks good on the surface… but what else should we consider before taking this plunge?

They say hindsight is always 20/20, and I think this is the case in your situation. I think I would have taken a parent loan when you daughter started college. A 10 year parent loan for $22,000 would have put the payment right in the price range you are talking about, and if you started payments as soon as you took out the loan, you would already be 2 years in, with just 8 years left on the loan.
Only $22,000 in student loans is pretty impressive. We did save for our kids college, and had help from grandparents, but still have to borrow $45,000.

 

[kirstenb1]

We took out a HELOC loan for 3 yrs, 15,000 dollars. It was for home improvements. Our house will be paid off in 2 yrs---the roof is 17 yrs old, so we may well take out another one. The roof is going to be very expensive, multiple steep slopes, gables, dormers etc.


Anyway, I wouldn't hesitate---fixed interest rate, low rate ,etc. The tricky part was they issued us credit cards tied to the HELOC. I'm a spendthrift married to a penny pincher. Many years ago, we realized it was better for the pennypincher to manage our bills, LOL!! Seriously, if you do this, I'd just shred the credit cards or freeze them. It was really tempting to me to use them.

 

[Kellydelly]

I would never take out a home equity loan to pay for my children's college loan. If you had the money to pay for her college you would. Borrowing the money means you don't have the money. Offer what you can monthly without extending yourself, and keep the debt HERS. $22000 is not going to hurt her. Let her live at home and pay it down before she gets settled in whatever career she ends up in. JMHO . I am pretty sure Suze Orman would tell you not to do it!

 

[leebee]

They say hindsight is always 20/20, and I think this is the case in your situation. I think I would have taken a parent loan when you daughter started college. A 10 year parent loan for $22,000 would have put the payment right in the price range you are talking about, and if you started payments as soon as you took out the loan, you would already be 2 years in, with just 8 years left on the loan.
Only $22,000 in student loans is pretty impressive. We did save for our kids college, and had help from grandparents, but still have to borrow $45,000.

We considered a parent loan, but it was at 8% interest that started accumulating immediately. DD's loans are at 5% and subsidized by the government, so she has a grace period after graduation and can defer payments if she goes back to school or is accepted to a training program (trainee or apprentice at a dance company, for example), so that seemed the smart way to go at the time.

$22K in loans means DD goes to the state University and has managed to pick up some scholarship money along the way. Also, DH is adjunct faculty, teaching one class per semester in addition to his full time faculty position, which provides a 25% tuition waiver and about $1000 a month in additional income which also helps with the college bills. It's not what we'd hoped for for her, but she was in a very competitive graduating class and even with all her AP and honors classes and being third in her class, she didn't get into her top two choices (Middlebury and Skidmore) and although she was accepted at Hofstra and Syracuse with decent money (more than 50% of the cost) she still would have owed about $80K upon graduation. Luckily for all, DD is more than just book-smart! As it turns out, she is very happy here at UMaine and is glad she chose here, even though it was originally her "fall back" school!

 

[garnetandblack]

I would never take out a home equity loan to pay for my children's college loan. If you had the money to pay for her college you would. Borrowing the money means you don't have the money. Offer what you can monthly without extending yourself, and keep the debt HERS. $22000 is not going to hurt her. Let her live at home and pay it down before she gets settled in whatever career she ends up in. JMHO . I am pretty sure Suze Orman would tell you not to do it!

I think it's wonderful that they are paying off her student loans. We plan to 100% pay for DS's schooling, even if it means delaying retirement or going without vacations, etc.

I also think that Suze Orman and DR are a bit over the top. There is nothing wrong with debt if you manage it properly (even though most people can't).

OP - if you do pay off the SL with the HELOC you will be able to get a tax deduction on the interest. You won't get the tax deduction if the loans are in your daughters name, she will.

 

[tvguy]

We considered a parent loan, but it was at 8% interest that started accumulating immediately. DD's loans are at 5% and subsidized by the government, so she has a grace period after graduation and can defer payments if she goes back to school or is accepted to a training program (trainee or apprentice at a dance company, for example), so that seemed the smart way to go at the time.

$22K in loans means DD goes to the state University and has managed to pick up some scholarship money along the way. Also, DH is adjunct faculty, teaching one class per semester in addition to his full time faculty position, which provides a 25% tuition waiver and about $1000 a month in additional income which also helps with the college bills. It's not what we'd hoped for for her, but she was in a very competitive graduating class and even with all her AP and honors classes and being third in her class, she didn't get into her top two choices (Middlebury and Skidmore) and although she was accepted at Hofstra and Syracuse with decent money (more than 50% of the cost) she still would have owed about $80K upon graduation. Luckily for all, DD is more than just book-smart! As it turns out, she is very happy here at UMaine and is glad she chose here, even though it was originally her "fall back" school!

My rates were no where near that high. I had 3 different ones, as I recall they were like 4.5 5.5 and 6.5 %. There is a reason my tax advisor said to do the parent loans over a mortgage on our house, not exactly sure how but he said the tax write off was worth more with the parent loan than a mortgage. But I started payments immediately upon receiving the loans, and the balance was down to $27,000 after 8 years of payments last year when I paid it off with an inheritance.