Consolidate Debt and save money with low HELOC rates

These days you can get a home equity line of credit (HELOC) with a rate under 5.00%. HELOC’s are usually tied to the prime rate which is currently 3.25%.

Most banks will offer a HELOC rate with plus or minus 1.00% of the prime rate depending on your credit score. Though with rates at historic lows you will be hard press to find a bank offering prime minus 1.00% these days. We were recently quoted a HELOC rate of 4.25% from Citibank for a loan modification.

Getting a HELOC at 4.25% to payoff credit card debt at a lot higher interest rate makes financial sense. Especially if the credit card rate you are paying is in the double digits or higher, which we all know is actually the norm.

Though with a HELOC, rates are flexible since the rate is tied to the prime rate, so you run the risk of rates increasing. Most HELOC’s have a rate hike limit per year and for the lifetime of the HELOC.

You can use our HELOC/home equity line of credit calculator to see if consolidating your credit card, auto and other loans will save you money.

HELOC Interest - How it is calculated!

Interest on a HELOC
Because the balance of a HELOC may change from day to day, depending on draws and repayments, interest on a HELOC is calculated daily rather than monthly. On a 6% HELOC, interest for a day is .06 divided by 365 or .000164, which is multiplied by the average daily balance during the month. If this is $200,000, the daily interest is $32.88, and over a 30-day month interest amounts to $986.30; over a 31 day month, it is $1019.18.
In contrast, on a standard 6% mortgage, interest for the month is .06 divided by 12 or .005, multiplied by the loan balance at the end of the preceding month. If the balance is $200,000, the interest payment is $1000, regardless of whether there are 30 or 31 days in the month -- or 28.

APR on a HELOC
Don’t compare the APR on a HELOC with the APR on a standard loan because they mean different things. The APR on a HELOC is the interest rate, period. Among other things, it does not reflect points or other upfront costs, as the APR on standard loans does. Requiring lenders to show the interest rate on a HELOC twice is a strange way to protect borrowers, but there it is.

Advantages of HELOCs
HELOCs are convenient for funding intermittent needs, such as paying off credit cards, making home improvements, or paying college tuition. You draw and pay interest on only what you need.
Upfront costs are also relatively low. On a $150,000 standard loan, settlement costs may range from $ 2-5,000, unless the borrower pays an interest rate high enough for the lender to pay some or all of it. On a $150,000 HELOC, costs seldom exceed $1,000 and in many cases are paid by the lender without a rate adjustment.
Some HELOCs are convertible into fixed-rate loans at the time of a drawing. This is a useful option for borrowers who draw a large amount at one time.

The Risks of a HELOC
The major disadvantage of the HELOC is its exposure to interest rate risk. All HELOCs are adjustable rate mortgages (ARMs), but they are much riskier than standard ARMs. Changes in the market impact a HELOC very quickly. If the prime rate changes on April 30, the HELOC rate will change effective May 1. An exception is HELOCs that have a guaranteed introductory rate, but these hold for only a few months. Standard ARMs, in contrast, are available with initial fixed-rate periods as long as 10 years.
HELOC rates are tied to the prime rate, which some argue is more stable than the indexes used by standard ARMs. This is an illusion, however, arising from the fact that the prime rate doesn't change from day to day. In 2003, it changed only once, to a low of 4% on June 27. However, in the next three years it changed 17 times, by .25% each time, reaching 8.25% on June 29, 2006. In 1980, it changed 38 times and ranged between 11.25% and 20%.
In addition, most standard ARMs have rate adjustment caps, which limit the size of any rate change. And they have maximum rates 5-6% above the initial rates. HELOCs have no adjustment caps, and the maximum rate is 18% except in North Carolina, where it is 16%.
The financial crisis that erupted in late 2007 revealed another risk in HELOCs, which is that the lender has the right to cut an unused credit line. With property values declining during the crisis, many lenders did this, with the result that the borrowers found that they did not have the loan commitment they thought they had.

Interest HELOC – Deduction limits on HELOC interest

Home mortgage interest is deductible as an itemized deduction depending on various thresholds and whether it is to purchase or cash out on a refinance.

First home mortgage debt incurred to purchase a primary and second residence is deductible, provided the total acquisition debt is less than $1 million. In your case, you borrowed $99,000 or less. You would still have the ability to borrow and deduct the interest on another $901,000 in debt if you acquire a second residence.

When you refinance acquisition debt or take out additional debt such as a HELOC, you can deduct the interest on such debt if you use it to improve your residence and on up to an additional $100,000 that you can use for any purpose, except for the purchase of tax-exempt securities such as municipal bonds. If you use the $100,000 to buy a second home, then it gets thrown back into the $1 million pot.

In your case, you already borrowed $100,000 but did not state what it was for. If you used the $100,000 to purchase investments, you can claim the interest on the mortgage as either home mortgage interest or investment interest.

If you use it to take an around-the-world trip, then you can claim it only as mortgage interest.
Interest on borrowings in excess of the $100,000 would not be deductible unless it's for business or investment purposes, which would not be the case if you borrowed to purchase a new auto, unless some of the prior $100,000 was for improvements or investments. For example if you used $20,000 of the prior $100,000 to make improvements to the condo, then you could borrow up to an additional $20,000 to purchase the car and claim the interest as mortgage interest.