Author Topic: Taking Out Home Equity Loans  (Read 4634 times)

Sonoma912

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Taking Out Home Equity Loans
« on: September 15, 2016, 05:02:41 PM »
CW1 to CW2 - "I'm taking out a +20k home equity loan, since it will only increase my mortgage payment by roughly $60 per month."

20k borrowed is STILL 20k that has to be REPAID. I think people get caught up in the "It's only this much per month", which is how people end up with huge credit card balances that eventually become difficult to pay off due to the interest rate.

Helvegen

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Re: Taking Out Home Equity Loans
« Reply #1 on: September 15, 2016, 05:30:05 PM »
Hello, 2005!

SwordGuy

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Re: Taking Out Home Equity Loans
« Reply #2 on: September 15, 2016, 05:47:39 PM »
Hello, 2005!

It will take 50 years to pay off that 20,000 loan at $65 a month and 3.065% interest.

Golly.

Unless, of course, it's a balloon payment, which doubtless they will be unprepared to pay.

AM43

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Re: Taking Out Home Equity Loans
« Reply #3 on: September 16, 2016, 08:54:12 AM »
People with money ask "how much does it cost to buy?"
People without money ask "how much does it cost per month?"

Making Cookies

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Re: Taking Out Home Equity Loans
« Reply #4 on: September 16, 2016, 01:48:52 PM »
Hello, 2005!

It will take 50 years to pay off that 20,000 loan at $65 a month and 3.065% interest.

Golly.

Unless, of course, it's a balloon payment, which doubtless they will be unprepared to pay.

And they'll solve that problem by borrowing more money through an even more creative form of debt at some higher interest rate.

Jack

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Re: Taking Out Home Equity Loans
« Reply #5 on: September 16, 2016, 01:58:23 PM »
What's the money for? If it's for investing (e.g. the down payment on a rental property) or maybe for renovation (if the house is currently a "tear down" and the changes would allow it to be sold at market rate -- otherwise the ROI is typically negative) then it's a smart plan.

If it's for something else, then yeah, that's stupid.

Sonoma912

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Re: Taking Out Home Equity Loans
« Reply #6 on: September 16, 2016, 02:15:54 PM »
What's the money for? If it's for investing (e.g. the down payment on a rental property) or maybe for renovation (if the house is currently a "tear down" and the changes would allow it to be sold at market rate -- otherwise the ROI is typically negative) then it's a smart plan.

If it's for something else, then yeah, that's stupid.

It's for home renovations on a PRIMARY home that was purchased for over 500k in 2013(now worth around 600k), and CW1(who is mid 30's) doesn't plan on selling any time soon. It's basically to make the home look pretty. At the time of purchase, CW1 borrowed 50k for the down payment from the 401k, and paying back over 15yrs.

That's a large chunk of cash to take out of the market, considering that the home will likely never sell again(forever home). I understand that the 50k will be paid back to the 401k plan over15yrs, but we're talking about paying yourself back @ 4.5% interest with after tax dollars, vs getting the average 10%/yr return for 15yrs on the full 50k amount, had it been left untouched in the 401k . Once in retirement, DW1 will have to pay taxes again on that 50k that was replenished over the 15 yrs with after tax dollars.
« Last Edit: September 16, 2016, 02:30:16 PM by Sonoma912 »

K-ice

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Re: Taking Out Home Equity Loans
« Reply #7 on: September 16, 2016, 02:33:46 PM »
^^^^

I agree we need to know the context.  (Which you provided as I was typing)

I am a huge HELOC fan. Huge!

But in your CW's case they are probably spending the money on something stupid.  They sound quite excited about the only "$60 per month" payment which is not how you should treat a HELOC.

I have had one for about 7 years now and it never went below zero in the first 6 years.

About a year ago I tapped into it for some rental-real-estate leverage.  I still can't believe I can have access to such a large immediate source of cash.

As long as you do not use it to dig yourself a hole buying consumer goods I love my HELOC.

If you are in a consumer hole of CC debt, a HELOC may be a good way to help you get out of debt by paying a lower rate. $20K in CC debt at 20% would be over $300/month & you would "never" pay it off.  Apply the same payment to your 3% HELOC and your debt will be gone is about 5 years. Pay just the $60 and yes, your CW belongs on this "wall of shame".

After 6 years of discipline and never touching it I knew I could use it for leverage.


GreenEggs

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Re: Taking Out Home Equity Loans
« Reply #8 on: September 16, 2016, 02:57:41 PM »
Seems like a good way to borrow short term money, that you know you can repay quickly.  Much like a using a credit card, but larger amounts & reasonable rates. 

protostache

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Re: Taking Out Home Equity Loans
« Reply #9 on: September 18, 2016, 02:28:21 PM »
HELOCs are pretty great. We had to replace our HVAC this year and pulled it out of our HELOC. We could have paid cash but that would have set us back in another goal (maxing self-employed 401(k) this fall). With the HELOC we can cash flow the payments over the next few months without having to dip into the pot of cash waiting to be invested.

(Yes, waiting. Not market timing, we're just sitting on a lot of cash because we just had a baby and I wanted to be prepared. She's healthy and fine so when she's 3-4 months we'll put it in the accounts.)

gimp

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Re: Taking Out Home Equity Loans
« Reply #10 on: September 18, 2016, 04:22:18 PM »
I still prefer to call them "second mortgages" to remind us what they really are.

They're great if you're smart with money, terrible if you're not.

Sofa King

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Re: Taking Out Home Equity Loans
« Reply #11 on: September 18, 2016, 04:44:30 PM »
I still prefer to call them "second mortgages" to remind us what they really are.

They're great if you're smart with money, terrible if you're not.

I concur!

frugalnacho

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Re: Taking Out Home Equity Loans
« Reply #12 on: October 07, 2016, 01:05:42 PM »
What's the money for? If it's for investing (e.g. the down payment on a rental property) or maybe for renovation (if the house is currently a "tear down" and the changes would allow it to be sold at market rate -- otherwise the ROI is typically negative) then it's a smart plan.

If it's for something else, then yeah, that's stupid.

It's for home renovations on a PRIMARY home that was purchased for over 500k in 2013(now worth around 600k), and CW1(who is mid 30's) doesn't plan on selling any time soon. It's basically to make the home look pretty. At the time of purchase, CW1 borrowed 50k for the down payment from the 401k, and paying back over 15yrs.

That's a large chunk of cash to take out of the market, considering that the home will likely never sell again(forever home). I understand that the 50k will be paid back to the 401k plan over15yrs, but we're talking about paying yourself back @ 4.5% interest with after tax dollars, vs getting the average 10%/yr return for 15yrs on the full 50k amount, had it been left untouched in the 401k . Once in retirement, DW1 will have to pay taxes again on that 50k that was replenished over the 15 yrs with after tax dollars.

This is a common misconception about 401k loans and repayment, but you aren't paying taxes again.

Let's assume you have $50k in your 401k, and also $50k cash.  You've already paid your taxes on your cash, it's yours free and clear.  You have not paid taxes on the 401k yet, you will when you retire and withdraw it. 

Now you take a loan for the full $50k from your 401k.  No taxes are withheld.  You take the money and put it in your savings acount.  You decide not to purchase whatever you were going to purchase with your loan, so you decide to pay it back - you pay it back with the $50k of cash you had before you took the loan.  Now you have $50k in the bank, $50k in your 401k, no taxes were withheld, and no taxes are owed (besides the taxes you will owe when you eventually withdraw from your 401k - which you would have owed anyway).  You have not been double taxed.  Because of the fungibility of money you could have spent any of the money any way you pleased and paid back the 401k with different money, but hopefully this example illustrates that you won't actually be getting double taxed.

Usually a 401k loan charges interest, and you do get double taxed on that amount.  If you borrow $50k, and end up paying back $51k because of interest then you have been taxed in the year you earned that extra $1k, plus you will be taxed when that $1k is withdrawn.  The original $50k was put in pre-tax, and pulled out (for the loan) pre-tax, so you won't be getting double taxed on that amount.


clarkevii

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Re: Taking Out Home Equity Loans
« Reply #13 on: October 08, 2016, 02:32:08 PM »
I still prefer to call them "second mortgages" to remind us what they really are.

They're great if you're smart with money, terrible if you're not.

I concur!

I'm game. In what scenario would it be advantageous to open up a line of credit on your home?

The best rates I can find are in the 5% range

Kitsune

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Re: Taking Out Home Equity Loans
« Reply #14 on: October 08, 2016, 03:11:31 PM »
I still prefer to call them "second mortgages" to remind us what they really are.

They're great if you're smart with money, terrible if you're not.

I concur!



I'm game. In what scenario would it be advantageous to open up a line of credit on your home?

The best rates I can find are in the 5% range

They're great if you're smart with money, terrible if you're not - also applies to credit cards...

And re: the 5% rate on a HELOC... I have that rate on a line of credit that's not attached to my home. Even better. (Use: emergency money when other money takes 24-48 business hours to access, not regular use but good as a net).