The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Steeze on March 07, 2020, 01:41:29 PM
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My house (co-op) is paid in full. I am looking at HELOCs at my local credit union and the rates and terms seem to be pretty great right now. Low rates, no closing costs, etc. same place that issued the original mortgage.
Is it prudent to apply for a HELOC even though I do not have an immediate use for it? Maybe I would consider a real estate deal if something interesting came up. Seems like I should have one just to have it, because, why not? Just a big extra emergency fund or opportunity fund right?
Any reason not to? What am I missing?
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Some have a small annual fee (maybe ~$50) and a larger fee (~$350) that gets charged when you close it out, so they essentially back load their closing costs. The rates are also typically variable, so if you're going to be using a large chunk and taking a while to pay it back then your rates could increase over time.
Ultimately depends on how you use it but probably not a ton of downsides for a typical person on this forum. Had a tertiary friend who took out a HELOC to pay off a 4% loan on his Jeep because it would lower his monthly payment and he could pay it off over 30 years, so yeah....
A big benefit for us is using the HELOC as our emergency fund. It's not ideal if you only have a small amount of equity in your home but if you have substantial equity then freeing up your current EF to invest should work out well over the long run. We've also used it to pull the trigger on real estate deals that have come up so that we could avoid pulling money out of the market. So we've pretty much used it exactly as you described and don't see much of a downside.
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A big benefit for us is using the HELOC as our emergency fund. ....
So we've pretty much used it exactly as you described and don't see much of a downside.
One variety of market crash is a liquidity crunch, during which banks end HELOCs. You might look closer at the terms - they can wipe your emergency fund out of existence when they choose. They can "call the loan", meaning you have to pay it off immediately and cannot borrow further.
Credit cards can also lower your credit line as they see fit. Doesn't happen during normal times, but some emergencies involving liquidity can dramatically change where you can get credit.
Most advice I've seen recommends an emergency fund in cash - like a savings account.
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You're right, there is no downside except for the costs involved to open/maintain/close it.
As for the other downsides that people have mentioned, those aren't downsides of having it, those are risks of using it.
You should absolutely do a full risk analysis before using a HELOC for anything, but those are not reasons not to have it.
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Thanks all! I’ve been reading more about it, as the callable nature of the loan freaks me out a little. It seems like if your DTI and LTV were at reasonable levels there would be less risk of a bank suddenly closing the line. Essentially the bank should prioritize closing the most risky lines first. So maybe I would go with a <70% LTV for example, instead of the higher percentages offered.
Is there anyway to see data on what this particular credit union did during 2008-2010 era? Think my banker could / would answer pointed questions about that?
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I wish I could find a HELOC with no fees/closing costs. When I went shopping around for one recently I couldn't get around appraisal and other closing costs. Made it not worth it for me. I would like to have it available just as an option, would cut down our EF a bit but would still keep a small cash cushion since....you never know. Even a small annual fee I would be okay with.