detlef Posted January 9, 2012 Share Posted January 9, 2012 Just curious. I'm in a 15 year loan with 3.875% and am fortunate enough to have found a local credit union that earns me 2.5% on my checking account. The 2nd part is particularly nice because I no longer have to dick around with shuffling money from my checking account into on-line savings accounts and back and forth to try and get my cash to do something. But I'm seriously contemplating pushing money up against my home loan to create enough equity that I can take out a HELOC for the amount that I have sitting @ 2.5% as my short term reserves. Needless to say, this would mean I would be "earning" more money on it as it would exponentially increase the rate at which I'm attacking the principle on my house because the amount I'm paying interest on would decrease by almost 25% overnight. I've heard of this technique before but I guess I'm worried about the line getting shut down if and when I needed to cash it out (which, of course, would hopefully be never). Quote Link to comment Share on other sites More sharing options...
Joessfl Posted January 9, 2012 Share Posted January 9, 2012 Just curious. I'm in a 15 year loan with 3.875% and am fortunate enough to have found a local credit union that earns me 2.5% on my checking account. The 2nd part is particularly nice because I no longer have to dick around with shuffling money from my checking account into on-line savings accounts and back and forth to try and get my cash to do something. But I'm seriously contemplating pushing money up against my home loan to create enough equity that I can take out a HELOC for the amount that I have sitting @ 2.5% as my short term reserves. Needless to say, this would mean I would be "earning" more money on it as it would exponentially increase the rate at which I'm attacking the principle on my house because the amount I'm paying interest on would decrease by almost 25% overnight. I've heard of this technique before but I guess I'm worried about the line getting shut down if and when I needed to cash it out (which, of course, would hopefully be never). Doesnt it all depend on what the HELOC rate is? That is usually different than the mortgage rate or the checking interest rate. Quote Link to comment Share on other sites More sharing options...
detlef Posted January 9, 2012 Author Share Posted January 9, 2012 Doesnt it all depend on what the HELOC rate is? That is usually different than the mortgage rate or the checking interest rate. It matters a bit but that only comes into play if you actually pull the money out. That said, after posting this, I did some more research on the theory and found far too many people telling cautionary tales of the bank canceling the HELOC at the worst possible time. Quote Link to comment Share on other sites More sharing options...
Atlanta Cracker Posted January 9, 2012 Share Posted January 9, 2012 It matters a bit but that only comes into play if you actually pull the money out. That said, after posting this, I did some more research on the theory and found far too many people telling cautionary tales of the bank canceling the HELOC at the worst possible time. I wouldn't do it for your primary cash reserves but if you have excess cash reserve then paying it down could make sense. In your business I would err towards keeping more in cash and relying less on a HELOC. I saw quite a few get cancelled that weren't being used fully in 2008 and 2009. If you are going to use it for a renovation or something then pay it off it works fine because you take the money up front. Quote Link to comment Share on other sites More sharing options...
detlef Posted January 9, 2012 Author Share Posted January 9, 2012 I wouldn't do it for your primary cash reserves but if you have excess cash reserve then paying it down could make sense. In your business I would err towards keeping more in cash and relying less on a HELOC. I saw quite a few get cancelled that weren't being used fully in 2008 and 2009. If you are going to use it for a renovation or something then pay it off it works fine because you take the money up front. Thanks. The more I think about it, the spread between what I'm earning in my checking account and what I'd be saving in interest on my home loan simply isn't big enough to deal with the potential BS. Quote Link to comment Share on other sites More sharing options...
rajncajn Posted January 9, 2012 Share Posted January 9, 2012 Thanks. The more I think about it, the spread between what I'm earning in my checking account and what I'd be saving in interest on my home loan simply isn't big enough to deal with the potential BS. I used it to help with house repairs which was nice because I got a good rate plus I could claim it on my taxes (this was before the SBA loans were made available). It's also nice to use as a regular line of credit due to the much lower rate, but for what you're looking to use it for seems like too much of a hassle for the very little amount of benefit other than the fact that your money is a little more accessible. Quote Link to comment Share on other sites More sharing options...
Big Country Posted January 9, 2012 Share Posted January 9, 2012 I'll go ahed and assume that the 3.875% that you are comparing to the 2.5% is not tax adjusted. Assuming you are in the 25% tax bracket, and itemize your deductions to take the mortgage interest deduction, your effective mortgage rate is more like 2.9% (3.875*.75), making it even less of a spread. Have you considered a no or low cost refinance? You can get close to a 3.25% rate on a 15 year deal with very low closing costs. That could save you a decent chunk of change in interest payments over the life of the loan, and you could more aggressively attack the mortgage principal by paying what you do now as oppossed to just the new lower amount. Quote Link to comment Share on other sites More sharing options...
detlef Posted January 9, 2012 Author Share Posted January 9, 2012 I'll go ahed and assume that the 3.875% that you are comparing to the 2.5% is not tax adjusted. Assuming you are in the 25% tax bracket, and itemize your deductions to take the mortgage interest deduction, your effective mortgage rate is more like 2.9% (3.875*.75), making it even less of a spread. Have you considered a no or low cost refinance? You can get close to a 3.25% rate on a 15 year deal with very low closing costs. That could save you a decent chunk of change in interest payments over the life of the loan, and you could more aggressively attack the mortgage principal by paying what you do now as oppossed to just the new lower amount. We actually just got into the 3.875 with a loan that actually paid us more than the closing costs. I could have gotten 3.5 and gotten almost enough to pay the closing costs but figured out that it would take over 5 years to save the amount we didn't get at closing. And that doesn't take into account the fact that we can use that money to pay off the last of our cars we still owe anything on, saving us that interest as well. Pushing out the effective break-even date on the savings the lower interest rate would catch up. Sure, there's reason to believe that we'll be in the house longer than another 6 years and, given how low these rates are, I'm sure we'll be in this loan as long as we're in the house, but it seemed like a better deal to pay another $20 a month in payments for the extra cash up front. In other words, taking the theory of never paying down points to the extreme. Quote Link to comment Share on other sites More sharing options...
Caveman_Nick Posted January 9, 2012 Share Posted January 9, 2012 I avoid debt like it's herpes. I keep a certain amount of liquid capital available. the rest of my money gets invested. Quote Link to comment Share on other sites More sharing options...
detlef Posted January 10, 2012 Author Share Posted January 10, 2012 We actually just got into the 3.875 with a loan that actually paid us more than the closing costs. I could have gotten 3.5 and gotten almost enough to pay the closing costs but figured out that it would take over 5 years to save the amount we didn't get at closing. And that doesn't take into account the fact that we can use that money to pay off the last of our cars we still owe anything on, saving us that interest as well. Pushing out the effective break-even date on the savings the lower interest rate would catch up. Sure, there's reason to believe that we'll be in the house longer than another 6 years and, given how low these rates are, I'm sure we'll be in this loan as long as we're in the house, but it seemed like a better deal to pay another $20 a month in payments for the extra cash up front. In other words, taking the theory of never paying down points to the extreme. Update: Just got an offer from another bank at 3.375 that covers all costs except $350. With that, I'd need only 35 mos to save the difference, which seems much more likely. I have absolutely no reason to think I won't be in this house for another 3 years and it's pretty freaking safe to say that I'm not going to do another re-fi. This rate also basically insures that every extra penny I have can be better invested anywhere but against my mortgage. Quote Link to comment Share on other sites More sharing options...
MrTed46 Posted January 10, 2012 Share Posted January 10, 2012 Just curious, what % equity in a house must the average person have to get a HELOC these days? Quote Link to comment Share on other sites More sharing options...
detlef Posted January 10, 2012 Author Share Posted January 10, 2012 Just curious, what % equity in a house must the average person have to get a HELOC these days? However much more than 20% that you want to take out. As long as what you owe on the to 1st plus what you could owe if you maxed the HELOC add up to less than 80% (and I'd assume these days they probably want a bit of cushion) you should be fine. Quote Link to comment Share on other sites More sharing options...
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