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?
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.