Author Topic: Turn Student Loan Into HELOC/Equity Loan?  (Read 4756 times)

randymarsh

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Turn Student Loan Into HELOC/Equity Loan?
« on: July 07, 2014, 08:46:44 PM »
Can someone give me a crash course in HELOCs and equity loans?

Situation: I (well my dad) have a $42,000 Parent PLUS student loan at 7.9%. Repayment begins in December. I'm responsible for payments, but he can and would pay it if I could not.

That interest rate sucks though. I'm thinking about asking him to refinance it in to a HELOC or equity loan. But I'm confused even after reading up on them.

A HELOC functions basically like a credit card right? You write checks/make payments against the credit line. Variable interest.

An equity loan gives you the entire amount up front. Fixed interest.

But I read about draw periods and then repayment begins? The Wells Fargo website makes it sound like I can borrow money during the draw period and not pay a cent until 10 years later or maybe only interest? That can't be right....can it? I don't plan on doing this, but it sounds like a giant security blanket while I'm starting my career.

You only get the lowest rates of course with a variable rate. I saw Pen Fed's 5/5 loan where the rate only resets every 5 years. That sounds like a happy medium. The rates are still ~4% and I should be able to pay it off within 5 years. The overall term is 15 years. This from Penfed's website makes it sound like I don't have to pay anything as long as the loan is paid off by then?

Quote
The 5/5 ELOC has a term of 180 months during which time the member can access the account. Non-owner occupied properties have a term of 144 months. The loan must be paid off at the end of the term. Members with expiring 5/5 ELOCs will be contacted prior to the maturity date with an offer to refinance the credit line if there is a balance.

Other details: The house is almost paid off. A brand new Accord costs more. Dad's job is very stable. I would consider taking out a life insurance policy since this loan can't be discharged like the PLUS loan. I just finished school and currently take home $1,800 a month as an intern. Actively searching for a 40K+ job.

The biggest risk seems to be taking on a variable HELOC and then having it shoot up to 18% (the max I saw) but that seems unlikely in the next few years. Right?? "And home prices NEVER fall" they said.... But a 5/5 or fixed option could reduce/eliminate that risk.
« Last Edit: July 07, 2014, 10:03:41 PM by thefinancialstudent »

Primm

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #1 on: July 07, 2014, 09:17:11 PM »
Sooo, you're asking your dad to turn what is effectively an unsecured personal loan (I know it isn't, but for all intents and purposes it really is) into a mortgage against his house? I don't know if you've actually run this past your dad yet, but if you were my child I know what my answer would be.

No. Just no.

randymarsh

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #2 on: July 07, 2014, 10:01:21 PM »
I mean either way it has to be paid. It's in his name regardless. Right now there's the risk of default and the department of education garnishing his paycheck and later social security. 

Primm

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #3 on: July 07, 2014, 11:02:48 PM »
And you're ok with that?

Again, I'd rather an unsecured loan to provide money for my child over a loan secured by the roof over my head. But maybe that's just me.

BFGirl

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #4 on: July 07, 2014, 11:03:47 PM »
Since you say he "can and would" pay this if you don't then the threat garnishment isn't that dire.  If he goes with your refinance plan, then there is the possibility of losing his almost paid off house.  If he had wanted to add a second mortgage to his home to pay for your college I would think he would have done it at the time.

I am with Primm on this one; I would tell you no.

randymarsh

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #5 on: July 08, 2014, 05:16:56 AM »
And you're ok with that?

Again, I'd rather an unsecured loan to provide money for my child over a loan secured by the roof over my head. But maybe that's just me.

That's the situation right now with the PLUS loan. It's not how I'd prefer, but I can't refinance it into my name.

BFGirl

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #6 on: July 08, 2014, 06:07:24 AM »
And you're ok with that?

Again, I'd rather an unsecured loan to provide money for my child over a loan secured by the roof over my head. But maybe that's just me.

That's the situation right now with the PLUS loan. It's not how I'd prefer, but I can't refinance it into my name.

Are you saying the plus loan is secured by his house?

Gin1984

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #7 on: July 08, 2014, 06:35:02 AM »
And you're ok with that?

Again, I'd rather an unsecured loan to provide money for my child over a loan secured by the roof over my head. But maybe that's just me.
It is not unsecured, the federal government will go after you if it is not paid.  Nothing you have is safe. 

randymarsh

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #8 on: July 08, 2014, 06:53:50 AM »
And you're ok with that?

Again, I'd rather an unsecured loan to provide money for my child over a loan secured by the roof over my head. But maybe that's just me.

That's the situation right now with the PLUS loan. It's not how I'd prefer, but I can't refinance it into my name.

Are you saying the plus loan is secured by his house?

No, the PLUS loan is unsecured. But carries the risk of garnishment. A HELOC carries the risk of losing the house, but that seems unlikely. If we did the 5/5 loan, there's a decent chance I'd have it paid it off or the balance extremely low before the interest rate changed. No matter what my dad or myself is responsible for a minimum payment of ~$300 regardless if it's PLUS or equity.

This is just an idea right now. I need to get a permanent job first anyway. I was interested in learning more how the different loans worked for future reference though. I never knew there were so many options.

Cheddar Stacker

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #9 on: July 08, 2014, 09:46:44 AM »
In either scenario you (not your dad) intend to pay this off correct? Even if you don't/can't your dad intends to pay it off, correct? So all this talk of "being ok with this" and "telling you no" doesn't seem to matter. You and your dad have already agreed to this, and now your just optimizing. I say go for it.

7.9% is silly in today's environment. 4% is reasonable.

$42K @ 7.9% for 7 years = $653/month with total interest of $12,813.
$42K @ 4.0% for 7 years = $574/month with total interest of $6,224.
$42K @ 4.0% for 6 years = $657/month with total interest of $5,311.

You can swing $650/month on that income, particularly if you stay with dad for a while or if you get a better paying job. Switch to 4% and pay everything you can ASAP to get you and your dad out from underneath this burden. Don't worry about the "pay nothing for the first x years" because it will be accruing interest and putting you into a bigger hole.

randymarsh

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #10 on: July 08, 2014, 10:12:46 AM »
In either scenario you (not your dad) intend to pay this off correct? Even if you don't/can't your dad intends to pay it off, correct? So all this talk of "being ok with this" and "telling you no" doesn't seem to matter. You and your dad have already agreed to this, and now your just optimizing. I say go for it.

You can swing $650/month on that income, particularly if you stay with dad for a while or if you get a better paying job. Switch to 4% and pay everything you can ASAP to get you and your dad out from underneath this burden. Don't worry about the "pay nothing for the first x years" because it will be accruing interest and putting you into a bigger hole.

That's all correct.

Even if I moved out, I should be able to pay that $650. And of course I'd put any extra income towards this.

Numbers Man

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #11 on: July 08, 2014, 10:16:41 AM »
In either scenario you (not your dad) intend to pay this off correct? Even if you don't/can't your dad intends to pay it off, correct? So all this talk of "being ok with this" and "telling you no" doesn't seem to matter. You and your dad have already agreed to this, and now your just optimizing. I say go for it.

7.9% is silly in today's environment. 4% is reasonable.

$42K @ 7.9% for 7 years = $653/month with total interest of $12,813.
$42K @ 4.0% for 7 years = $574/month with total interest of $6,224.
$42K @ 4.0% for 6 years = $657/month with total interest of $5,311.

You can swing $650/month on that income, particularly if you stay with dad for a while or if you get a better paying job. Switch to 4% and pay everything you can ASAP to get you and your dad out from underneath this burden. Don't worry about the "pay nothing for the first x years" because it will be accruing interest and putting you into a bigger hole.

I concur. I have twins that just finished college in May and am doing exactly what you have contemplated. Like Cheddar Stacker wrote, 7.8% is silly in today's interest rate environment.

ingrownstudentloans

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #12 on: July 08, 2014, 10:25:27 AM »
Also, depending on the income of the person responsible for the student loan, the interest might not be deductible while the HELOC interest may be....I am unsure about this given the parent plus loan and the heloc as opposed to first mortgage issues, but I think it still holds true.

I am about to refi my house and take some cash out so that I can pay off some student loans because as a mortgage the interest is tax deductible...as student loans I make too much for the deduction.

Cheddar Stacker

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #13 on: July 08, 2014, 10:40:03 AM »
Good points ingrown. Here are a few facts a lot of people don't know, or don't think about:

1) SL interest has an income limit, Mortgage interest doesn't(although itemized deductions can be limited overall).
2) SL interest reduces your AGI, Mortgage interest doesn't.
3) SL interest has deduction limit of $2,500, Mortgage interest has deduction limit of approximately $55K *.
4) SL interest can be taken in addition to standard deduction, Mortgage interest can't as it's part of itemization.
5) SL interest is disallowed when MFS (married filing separate), Mortgage interest can still be deducted.

Technically mortgage interest is only allowed to be deducted if it was used to purchase or improve a home. I have no idea if the IRS has ever successfully proven otherwise, and I think many people deduct it no matter what it was used for. SL interest likely has a similar rule, but I know some people use SL's for ordinary living expenses while in school. Again, I don't know how the IRS would prove this.

* Limited to $1M mortgage, plus $100K HELOC. Given current interest rates, it equates to somewhere in the $40-70K range depending on rates, so I just put it in the middle.

Gin1984

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #14 on: July 08, 2014, 10:41:44 AM »
Good points ingrown. Here are a few facts a lot of people don't know, or don't think about:

1) SL interest has an income limit, Mortgage interest doesn't(although itemized deductions can be limited overall).
2) SL interest reduces your AGI, Mortgage interest doesn't.
3) SL interest has deduction limit of $2,500, Mortgage interest has deduction limit of approximately $55K *.
4) SL interest can be taken in addition to standard deduction, Mortgage interest can't as it's part of itemization.
5) SL interest is disallowed when MFS (married filing separate), Mortgage interest can still be deducted.

Technically mortgage interest is only allowed to be deducted if it was used to purchase or improve a home. I have no idea if the IRS has ever successfully proven otherwise, and I think many people deduct it no matter what it was used for. SL interest likely has a similar rule, but I know some people use SL's for ordinary living expenses while in school. Again, I don't know how the IRS would prove this.

* Limited to $1M mortgage, plus $100K HELOC. Given current interest rates, it equates to somewhere in the $40-70K range depending on rates, so I just put it in the middle.
That is allowed.

Cheddar Stacker

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #15 on: July 08, 2014, 10:49:03 AM »
Cool, thanks Gin

ingrownstudentloans

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Re: Turn Student Loan Into HELOC/Equity Loan?
« Reply #16 on: July 08, 2014, 02:54:09 PM »
Good points ingrown. Here are a few facts a lot of people don't know, or don't think about:

1) SL interest has an income limit, Mortgage interest doesn't(although itemized deductions can be limited overall).
2) SL interest reduces your AGI, Mortgage interest doesn't.
3) SL interest has deduction limit of $2,500, Mortgage interest has deduction limit of approximately $55K *.
4) SL interest can be taken in addition to standard deduction, Mortgage interest can't as it's part of itemization.
5) SL interest is disallowed when MFS (married filing separate), Mortgage interest can still be deducted.

Technically mortgage interest is only allowed to be deducted if it was used to purchase or improve a home. I have no idea if the IRS has ever successfully proven otherwise, and I think many people deduct it no matter what it was used for. SL interest likely has a similar rule, but I know some people use SL's for ordinary living expenses while in school. Again, I don't know how the IRS would prove this.

* Limited to $1M mortgage, plus $100K HELOC. Given current interest rates, it equates to somewhere in the $40-70K range depending on rates, so I just put it in the middle.

Nice list, cheddar. And good point about the purchase/improvement to the home limitation on the deduction.  My refinance is actually for a bedroom remodel that I want to do....and other house-type things to make it better, nicer and newer.