Pay off Heloc with Emergency fund? (funds, rate, credit, accounts)
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Hi Everyone, I am purchasing my first home and taking out a Heloc to get a slightly lower interest rate on the first loan and to be able to 'work' towards a lower payment (its a mental thing). The nut is a bit more then I wanted ($56k), but that is the minimum it can be to get the lower mortgage rate.
To my understanding I can take $ from the Heloc (up to the initial line of credit) at any time. Given that the interest rate on the heloc is variable and currently at 5.25% and my savings account is getting less then 1% would it make sense to pay off a good chunk up front? I'm thinking of something around half of the initial loan, but it would leave me with next to no cash, which I would have to start saving again.
I'm going to say something that will make everyone nuts -- Yes. I'd put all my e-fund into the HELOC.
With Caveats. You need to have other money, like retirement accounts and investments. And your house has to be in decent shape, where you aren't going to be tapping the HELOC every time you turn around. Your HELOC is going to be a true emergency fund. Not a "I need a new TV" fund.
Here's my reasoning. That money is available to you. It's not cheap money, but it's available. And while everyone goes on about an emergency fund, if you have 40K in an account that's earning nothing, what's the point? Put that into the HELOC and pay it down, and for ten years (at least when I had a HELOC it was 10 years) you're building up your other money and have a HELOC at your disposal, as you keep paying down that HELOC, too.
And before anyone thinks I'm crazy -- we did exactly that. We kept our HELOC as long as we could just in case, and invested the rest of our cash.... and that "emergency" that we kept it for NEVER HAPPENED.
One of the other reasons I'm not a fan of the large emergency fund. When you don't have a lot of cash, you need to have your money WORKING for you, not sitting....
Keep the emergency cash in your Saving account, after you have about 9month of living exp, then start paying down your Heloc big time. The bank can pull/close your Heloc anytime it wants to, and if you have a emergency you then can't pull cash from your Heloc.
The banks already did a mass freeze on HELOC's when they saw housing prices decline and they can do it again. Freeze means you cannot draw against your HELOC, only pay it back.
The safest place for your emergency fund is in a high rate savings account. Second best place is CD's if you choose a bank that does not currently prevent withdrawals/early closing and will not change the terms in the future.
Emergency funds are important for individuals and even more important for families. While Tallysmom may never have needed the emergency fund, that is not to say you would not.
If you need a HELOC to purchase a home, it does not sound like you can afford to buy a home now. Definitely do not deplete your savings. You will need funds for unexpected maintenance/repairs.
I don't the OP was trying to purchase a home. Instead, in the past they used their HELOC for some things and now have the cash to pay a good chunk of it off. They were wondering if that was a smart move, i.e. pay down the HELOC to save the 5.25% interest but be able to get that money back if it was needed for an emergency. flynopia and I suggested against it because the banks can change the terms of the HELOC.
If you need a HELOC to purchase a home, it does not sound like you can afford to buy a home now. Definitely do not deplete your savings. You will need funds for unexpected maintenance/repairs.
THIS. +1,000!!!!
OP, if you have the savings, just put it toward a down payment. There is NO reason why a first time homebuyer with good credit should have a mortgage interest rate higher than the low 4% range.
Quote:
Originally Posted by md21722
abbymm,
I don't the OP was trying to purchase a home. Instead, in the past they used their HELOC for some things and now have the cash to pay a good chunk of it off. They were wondering if that was a smart move, i.e. pay down the HELOC to save the 5.25% interest but be able to get that money back if it was needed for an emergency. flynopia and I suggested against it because the banks can change the terms of the HELOC.
Did we read the same OP? It says "I am purchasing my first home and taking it a HELOC to get a slightly lower rate on the first note".
Whoops, I completely missed that part and focused on the 2nd part where the OP was considering putting all his savings towards the HELOC with the idea that if he needed the savings he could get it back from the HELOC.
The OP should not assume that he can withdraw from the HELOC because the bank could freeze it. The OP should keep money in their savings for emergencies.
A 30 year should be around 4%. It will take a while to pay down $56K at 5.25%. Is this the best deal you can get? Have you checked with other banks?
Thanks for the responses everyone. Broker told me that if I did not do the Heloc, the mortgage would be around 4.5. Home price is 325k, I'm putting down 45k, avg credit score is 710 ish. I spoke to one other broker and they quoted me at 4.5. The goal would be to pay off the Heloc in 2 years, but of course things do come up.
Hi Everyone, I am purchasing my first home and taking out a Heloc to get a slightly lower interest rate on the first loan and to be able to 'work' towards a lower payment (its a mental thing). The nut is a bit more then I wanted ($56k), but that is the minimum it can be to get the lower mortgage rate.
To my understanding I can take $ from the Heloc (up to the initial line of credit) at any time. Given that the interest rate on the heloc is variable and currently at 5.25% and my savings account is getting less then 1% would it make sense to pay off a good chunk up front? I'm thinking of something around half of the initial loan, but it would leave me with next to no cash, which I would have to start saving again.
Any thoughts?
I would hold onto the cash. Your HELOC can be cancelled for reasons unrelated to your own credit, such as the bank having financial problems.
If it were me, I would pay the HELOC off over time, as soon as possible, with excess cash every month.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
