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I'm shopping for mortgages and went to Bank of America (where I'm a premiere customer) on Friday. I overhear the other Bank loan officer trying to push for another couple to get a home equity loan of 80K to pay off their other debts. My loan officer is also trying to push to get me to 50K home equity loan at 3.75% to pay off a 4.9% car loan. He's telling me all the great things about Home equity loans and that's it's tax deductible. I told him I get hit with the AMT and paying off a car loan would not be tax deductible for me. I'm intending to pay the car loan off in the next 18 months anyways with cash.
I know that the home equity loans interest rates are tied into the Fed rate so now it is a good time to lock into a rate at around 3.5-4.5%.
However, this is where people will run into trouble again. It's like history repeating itself over and over again.
Supposed these people took out the 80K, and than their home value declined again. I'm sure they had plenty of equity in their home or else the mortgage officer would not have offered it to them. But supposed the house decline by another 40K? Than supposed the Fed raised the rate steadily over the next 2 years back to 3-5%. Than their home equity loan will raise again to 7-8%. Supposed they get hit with the AMT, Alternative Min. Tax (you can't deduct interest on home equity loans with the AMT if you do not use the loans specifically for home improvements....another bad thing about AMTs!!).
Now you have people in trouble 2-3 years down the road again with their mortgages.
I'm a saver, and would NEVER use my home as a ATM. That's why I always have at least 150-200K in my tax-exempt money market fund as my rainy day fund. I always have 2 years worth of living expenses since I'm self employed and you never know what can happen in the future. I would never tap my home equity unless it's a last recourse. Why does history want to repeat itself over and over again?
I did not even read your entire post, but wanted to add this for your consideration and will leave politics of the bank out of it. I worked at Bank of America for one and a half years. There is intense pressure for all banking and loan officers to sell Home Equity lines. Recently, BAC (Bank America Corp) instituted a prepay and an annual fee. They had been the pioneer of no fee home equity lines.
If you don't need it, you won't have a balance and it will only cost you in the end.
I'm sure I'm in the minority, but I disagree with "Don't use your home as an ATM" type statements. Your home's equity is just another source of money that you OWN. Yes, it is yours. It is not a gift, a lottery winning, a "helping hand".. it is your money that you worked hard to build up. If you want to use it, you can. Just like the money in your checking account and bank account and stock account... it's yours to do as you wish with it. Money is a tool, use it wisely. Do I suggest abusing the tool which is money? The answer is 'NO'.
Like the OP, if I had $200k in another account and cash laying around to pay off bills, then I would probably not get a HEL, but some people do need to tap into their equity to do so. It will help them to do this because it will be cheaper for them as the bank rep said. In the OP's case, it is not a better alternative, but it's certainly not the advise for everyone just because it is for her.
I have had a $500k line of credit for several years now, and it's a great back up source of money. In the years I've had it, i only used it once, and paid it off in a mater of months. It is definately not to be abused..! It isn't an ATM machine
I have my credit frozen to prevent ID theft, so if I need some quick money without going through the loan process, the LOC is great. If I want to buy a car or home, I can write a check and know it's covered...
It's through Bof A and there has never been an charges to use it, or have it..
The funny thing is that left & right lenders are reducing the limits on unused HELOC's secured by homes which have declined in value. In one instance a client of mine had his unused HELOC closed completely because his home's value fell so much.
I have had a $500k line of credit for several years now, and it's a great back up source of money. In the years I've had it, i only used it once, and paid it off in a mater of months. It is definately not to be abused..! It isn't an ATM machine
I have my credit frozen to prevent ID theft, so if I need some quick money without going through the loan process, the LOC is great. If I want to buy a car or home, I can write a check and know it's covered...
It's through Bof A and there has never been an charges to use it, or have it..
Hang onto to it and don't do anything to modify it, but for the duration, it's your's for free. The new HELOCs coming out now w/ BofA will have annual fees and an early prepayment penalties. If you don't have your original paperwork handy, I recommend you call the bank and ask them to send you a copy of your note and any other finance agreements you signed. I am not saying you have a problem - thinking ahead and it never hurt anyone to over-document. The prom note definitely has an "end" date and then the terms would be renegotiated if you wanted to renew. Chances are you have a 20 year term or a 25 year term. You are lucky you never received a letter reducing the amount on your line. The majority of HELOCs did get such a notice. (I also heard they got the notice with a reminder if they were late, they could bump the rate to the maximum usary as permitted by the state. But I have not verified the bumped rate info - so far none of my customers were hit).
The funny thing is that left & right lenders are reducing the limits on unused HELOC's secured by homes which have declined in value. In one instance a client of mine had his unused HELOC closed completely because his home's value fell so much.
That happened to me too. But a HELOC can still be a very good thing for someone who uses it correctly. I get asked about them every time I call one of my lenders. FWIW, I got a personal loan for $12k last week in 10 min. by phone, so loans are still being made.
I have a HELOC on my home because we're able to tap into it in case of an emergency, or see a good investment opportunity, etc. It does have an annual $25 fee but that's a small price to pay for having access to a line of credit that large.
It's a financial tool.... a really good one too! Like any financial tool, it's going to hurt you if you abuse or misuse it (think about credit cards!).
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