E3only

Same reason why wallstreet went down - the one word comes to mind is 'leverage'.......higher the leverage higher the pain when things do not go to plan.

Steerpike

I have a HELOC that is ridiculously low interest - currently around 2.7%, compared to my 'first' loan which is around 4.5%. Both are from BofA and relate to the same piece of property. Both are adjustable.

While paying 'as much as you can' in extra principal payments sounds good, as you note you can't always easily pull the money back out so be careful that you don't deplete your 'emergency money'. I have cash in the bank that equals my mortgage balance but I'm not paying off the mortgage because that cash in the bank is there in case I lose my job/etc.

E3only

Appreciate that, totally.

My point was - I don't mind the HELOC but it does not give me what i am looking for i.e. extra payments and then can withdraw if I want.

Michael

You can always draw up to the maximum amount of the HELOC. There is no such thing as fixed payments but just that you have to make interest payments and possibly a small amount of principle that is outstanding. So payments can vary from month to month depending on if you draw more out of the HELOC or pay beyond what is required. Think of it as a credit card.

However when the term of the HELOC has expired, you may have a balloon payment if you don't manage payments correctly.

Tarkak9

Unfortunately the banking system overhere doesn't cater for such desire. The closest you're going to find which resembles it, and what some people do, is to set up a HELOC (B); use it purely as a revolving credit to contribute extra payments towards the primary principal (A) and then deposit your original intended extra payment back to the HELOC principal, ... so an arrears two step process if you will. B pays A the extra payment, but you then pay B your otherwise intended extra payment - you're still able to shorten the life of the original loan but using the liquidity of a HELOC to do so but also have it on hand to discretionary draw against it should you need to. The same premise can be achieved using a credit card etc in lieu of a heloc payment but heloc rates are cheaper than a CC if one intends to carry a balance.... which is why people went nuts with helocs and treated them like any other of their maxed out credit cards and didn't use them as an effective tool for the long run. Banks don't want to teach you about money, they just want to take it from you.

Michael

Normally a HELOC is not part of your original purchase loan but is taken out afterwards when equity has been built up in a home. A friend of mine has had a $100,000 HELOC for about the last 10 years and has never drawn on it but pays the $50 annual fee. She only has it because she wants to make sure that she has available cash at a low interest rate if she ever needs it such as being laid off for a long period of time and wants to pay her mortgage payment on schedule.

When a person is laid off, it is usually impossible to refinance a mortgage even if you have 70% equity in a home so having a HELOC gives the security that may be needed if a layoff occurs.

paddingtongreen

We used to use ours for buying cars and other capital items. The weird thing is that the IRS doesn't seem to question the tax break on this loan, I think, because money is fungible and who can say which dollar paid for what.

E3only

That is an excellent point.

Remind me is HELOC is variable interest product? So if the variable is > 30 year fixed then I don't make anything doing that. Not that I want to make money using HELOC.

Let's say my 30 fixed on 1st Mortgage is 4%. In a year I am 20 grand more paid imp mortgage. Then I open 20K HELOC. Draw it down and pay into home loan. I then make extra payments into HELoc. I need that money I can draw anytime right ?

The key here of course is having liquidity but if the HELOC is at 6 % then it might not make sense.

E3only

Oh yeah that's one more thing I wanted to ask. Someone said you pay HOA insurance and everything else thru HELOC but IRS does not care. You still get tax deductions for interest even when stand alone HOA is not deductible ??

Steerpike

Interest paid on a HELOC is tax deductible, regardless of what the money is used for. It's one of the few remaining loopholes available to the masses ...

Giantaxe

Unless your bank reduces your HELOC limit (or withdraws it entirely) because you no longer have the equity you once did or your credit rating has declined. Many HELOC's terms allow banks to do this, unfortunately.

Michael

Only if it is part of the original loan, then it is 100% deductible but if you refinance or take out a HELOC and increase you principle by more than $100,000, interest paid on only an additional $100,000 is deductible.

Steerpike

Can you provide some background on this? I've never heard this. I have a HELOC with a limit of 200k, and used 150k of it to buy something. I deducted all the interest.

Edit - I did some searching and found this - http://www.bankrate.com/brm/itax/tax...20040520a1.asp - looks like you are correct; I had no idea there was a limit of 100k. Now, in my case, I used it to buy a short-sale condo in AZ with 'cash' (later re-financed as a conventional loan and paid off the HELOC) so I think I was ok deducting the interest but it's interesting to know about that limit.