Interest HELOC – Risks of HELOC

A lot of people use HELOC to buy real estate property for investments including me. One benefit will be that the interest you'll be paying on that HELOC will be tax-deductible. Sometimes people use a HELOC to finance a lifestyle that is beyond their means (expensive travel, vehicles, plasma TVs) - strictly speaking the interest on a HELOC used this way will not be tax-deductible.

Getting a HELOC is easy if you have equity in your home. The following are the risks associated with it:

• HELOCs are often structured as interest only, thus you are not paying down the principal. Look at your bank's statement when you your payment-due notice. Does it include any principal? It's a good idea to pay a little more whenever you can afford it.
• As the Fed raises the interest rate, HELOCs follow. My credit union’s term is that the HELOC rate gets adjusted on the next first of the month after the FED adjusted the prime rate. At the time of writing (summer 2005) this is not a time to hope for falling interest. Most experts expect at least two more hikes of 0.25% each. This means your minimum payment will rise.
• You lose equity in your house and may even end up 'upside down'. That is if you own a house worth $500,000 and you have a mortgage of $300,000 on it and a HELOC of $100,000. Now your total balance is $400,000. Let's say you need to sell the house and the price drops by 20% to $400,000. Then there is 6% real estate agent commission to be paid. That alone will be $24,000. I won't even add in the cost to clean the house / make it ready for a sale. $400,000 sale price / $24,000 transaction cost / $376,000 first mortgage / $100,000 HELOC equates to a ngative $76,000. Now imagine what happens if the house price drops by more than 20%. Not unrealistic at all.

However a HELOC is a good idea when you need to pay off credit cards (debt consolidation) since the interest rate is so much lower. Just make sure to change your spending habits or you'll need a second (or bigger) HELOC soon.

Also know that if you obtain a HELOC of $100,000 and you don't actually take out all the $100,000, maybe you only take out $12,000. If someone pulls your credit and looks at your loan-to-value ratio, they count your HELOC as $100,000 (because that's how much of a lien is against the property). It does not help you much that you only use $12,000 of the $100,000 line.

Interest HELOC – What is Prime rate? And the current value

The prime rate, as reported by the Wall Street Journal's bank survey, is among the most widely used benchmark in setting home equity lines of credit and credit card rates. It is in turn based on the fed funds rate, which is set by the Federal Reserve. The COFI (11th District cost of funds index) is a widely used benchmark for adjustable-rate mortgages. The prime rate varies little among banks, and banks generally make adjustments at the same time, although this does not happen with frequency. The prime rate is currently 3.25% in the United States. Canadian prime rate is currently 2.25%

Ratings methodology
What's included? The fed funds rate is the primary tool that the Federal Open Market Committee uses to influence interest rates and the economy. Changes in the fed funds rate have far-reaching effects by influencing the borrowing cost of banks in the overnight lending market, and subsequently the returns offered on bank deposit products such as certificates of deposit, savings accounts, and money market accounts. Changes in the fed funds rate and the discount rate also dictate changes in the Wall Street Journal Prime Rate, which is of interest to borrowers. The prime rate is the underlying index for most credit cards, home equity loans and lines of credit, auto loans, and personal loans. Many small business loans are also indexed to the Prime rate. The 11th District Cost of Funds is often used as an index for adjustable-rate mortgages.

Interest HELOC – HELOC vs. Home Equity Loan

This is always a question when someone wants to tap into his or her Home Equity. You have two major home equity options for borrowing money: the home equity loan and the home equity line of credit (HELOC). Both options allow homeowners to take out a loan based on the existing equity in their property. In both cases, the property is used as collateral and may be foreclosed upon should the borrower default on the loan.

Home Equity Loans
Home equity loans are given out in a single lump sum. The borrower walks away with a check for the total amount. Home equity loans have a fixed interest rate for the life of the loan – the borrower knows exactly how much his monthly payments will be ahead of time. Home equity loans are often a smart choice for borrowers who need upfront money for expenses such as credit card debt consolidation or a huge medical bill.

Home Equity Lines of Credit (HELOC)
A home equity line of credit (HELOC) is similar to a credit card. Instead of being handed a single lump sum amount, a borrower can withdraw from the line of credit whenever they wish to withdraw money. HELOC’s generally have a set draw period between 5 and 10 years. After the draw period, the borrower must either pay back the balance in full (a balloon payment) or enter a 5 to 10 year repayment period. HELOCs have variable interest rates generally tied to the national prime rate. That means, a borrower’s monthly interest charges may change from month to month. HELOCs are often a smart choice for borrowers who want to have a reserve for emergencies or need money for ongoing projects such as home renovation.

A simple Comparison Chart
Home Equity Loan
Closing costs is normally in several hundred dollars.
Fixed interest rate for life of loan.
Loan is paid back via equal monthly payments like a regular loan.
Interest is charged on entire amount of loan.
Interest is tax deductible in most cases Interest is tax deductible in most cases

HELOC
Very low or no closing costs
Variable interest rate, changes regularly.
Loan can be paid however the borrower wants to during the period of the loan but is generally paid back in a single balloon payment or 5-10 year repayment period.
Interest is charged only on the money withdrawn.
Interest is tax deductible in most cases

Choosing a Loan
Both HELOCs and home equity loans have their own pros and cons. The best loan for you is determined based on your needs. Take into consideration what the money is needed for, as well as your financial ability to deal with variable rates.

Interest HELOC – Rates and Terms you should know before you get a loan

A HELOC may seem like a simple loan but there is lot of different factors that you need to pay attention to. You will end up paying unnecessary fees or being charged a huge markup if you do not pay close attention. This article shows you how to watch out for common lender “tricks” and negotiate the best HELOC rates and terms.

HELOC Margin
The margin is the most important thing you should look for when shopping for a HELOC loan. Basically, the margin is the difference between the index rate and the interest rate the borrower will be charged. Most of the HELOC lenders use the prime rate as an index. Consider this example: if a borrower is given a 1% margin, he will always be charged 1 points above the prime rate. If the prime rate is at 3%, his interest rate will be 4%. If the prime rate is at 9%, his interest rate will be 10%.

HELOC interest rates are always adjustable rates. A borrower’s interest rate will be changing throughout the life of the loan. The margin, on the other hand, will always stay the same. Sometimes the margin is not included in the HELOC’s APR. Many HELOC loans come with an introductory rate for the first few months. It is not uncommon for this introductory rate to be used in determining the APR. When the introductory period is over, the borrower will be charged the actual interest rate. Creditworthy borrowers can sometimes find HELOCs at the prime rate (0% margin) or even less. Those with poor credit may find that they are given an extremely high margin (7% in some cases).
The margin is not always published. To determine what your HELOC margin is, you must ask the lender.

Watch out for the Hidden HELOC Fees
It is possible to take out a HELOC without paying any fees at all. However, unexpected charges have a way of sneaking into loan documents. When applying for a HELOC, make sure that you won’t be responsible for these unnecessary fees:
Application fee. Many lenders do not charge a fee for applying. If your lender does, they should be able to refund the money at closing.
Appraisal charge. Someone has to pay for an appraisal to be done, but most lenders will absorb this cost themselves.
Closing costs. Closing costs are common for many home loans, but not for the home equity line of credit. Don’t agree to pay closing costs, sometimes called “lender fees.”
Check fees. You shouldn’t be charged extra every time you withdraw from your credit line – you’re already going to pay interest on the amount you take out.
Annual fee. This line of credit will be open for 5, 10, or even 20 years. Annual fees can really add up - don’t get stuck paying extra money each year.
Inactivity fee. If you choose to save your credit line for emergencies, don’t let the lender punish you. The inactivity fee can almost always be waived.
Repayment penalty. You should never be penalized for paying off a line of credit before the end of the term – that’s the beauty of choosing a credit line over a more traditional loan.
Cancellation fee. It can be more difficult to get the cancellation fee waived, but it’s worth a shot. If your lender insists, you may be out about $500 should you choose to refinance or sell your home during the life of the HELOC.

Additional HELOC Features that you should look into
Many home equity lines of credit come with “special features” that benefit the borrower. You may not be able to have everything on this list added to your HELOC. But, it’s worth it to ask.
Lifetime interest rate cap. This is the maximum amount that your interest rate can adjust to during the life of the loan. Don’t accept a cap that is so high you will not be able to make the monthly payment.
Periodic interest rate cap. Few HELOCs offer this feature, but it’s one to look out for. If you know that your interest rate can only adjust so high during a certain time frame (i.e. a year), you won’t be surprised by a skyrocketing bill.
Interest-only payments. Many HELOCs allow borrowers to make interest-only payments during the draw period. You may not want to use this feature regularly, but it’s good to have in case of emergency.
Fixed-rate conversion. A few lenders allow borrowers to convert withdrawals to a fixed interest rate. When you take out a sum of money, you can specify the preferred term of the fixed-rate loan (5 years, 10 years, etc). This is an especially comforting feature for borrowers concerned about rising interest rates.
Low introductory rate. Most HELOCs come with an introductory rate – the lower, the better.
Long introductory term. Try to push for a long introductory term. That way you’ll be able to maximize the benefits of the lower interest rate.

By familiarizing yourself with the basic features and fees involved in HELOC loans, you’ll be prepared to make smart choices for your financial future. Make sure you present yourself as very knowledgeable when talking to the lender – the more questions you ask, the more able you’ll become to make an informed decision.

Interest Heloc – Why it is the best loan you can get!

If you are among the few people who have equity in their house and are eligible to get a Home Equity Line of Credit loan, get it right now! And get the maximum limit the bank is willing to give you. It is absolutely the best type of loan out there in many ways. Here are some of the great advantages of a Home Equity Line of Credit (HELOC).

• You will not have to pay any interest if you do not withdraw any cash from it.
• Once you get the line of credit, you can draw from it anytime you want upto the maximum limit. You will only be charged interest for the amount you draw.
• The interest rates for HELOC are very low right now. You can get a loan for Prime rate or sometimes even prime rate – 0.51%. The Prime rate right now is 3.25% for most banks.
• Once you get the line of credit, you line of credit maximum draw amount does not go down even if your house value goes down.
• All the interest payments are tax deductible.
• This is one of the best reasons. It can be your safety net in case you lose your job and have to foreclose your home. Assume your house is worth $400,000 and you have a first loan of $300,000 and $100,000 line of credit on it. Lets say the your house value has gone down to less than $300,000 and you lose your job. You can draw the $100,000 from your HELOC, put it in a bank and then foreclose your house. In this scenario, you will have $100,000 in your bank versus if you did not get a HELOC you would have nothing! This reason alone should make it a no-brainer for you to get this loan!

The only possible (not probable) downside to this is if you draw all the amount and neither lose your job nor your house and the Prime rate goes up in 5 to 6 years (It definitely will not go up before then), you might end up paying a couple of percent more interest. That’s the worst-case scenario which is no so bad at all!

I personally took my HELOC about 2 years ago when my house price still was good and I have a HELOC interest rate of Prime – 1.01% if I withdraw more than $50,000 and Prime – 0.51% if I withdraw less than $50,000. I have drawn about $120,000 from it and pay a interest rate of about 2.24%. Isn’t than a sweet deal!! And as for the $120,000, I have bought other real estate with it with positive cash flows (After paying the really low 2.25% interest). I used Third Federal for my HELOC. Unfortunately, they do not do HELOC for California anymore but they do for other states.