Confused; what to roll into a HELOC and is the HELOC the way to go

**jIM_Ohio** · 08-03-2010, 10:21 AM

What income do you have to pay the debts?

1) List income -gross and net, monthly and yearly

2) List expenses- your budget of all expenses per month
include annual expenses (like car registration and insurance) too.

do not include expenses you have not incurred (yet) like the contacts or vacation.

Here is my opinions with more questions:

1) Take the vacation. If you are losing your site, you get only 1 life, live it and take the vacation- whether you put the vacation on a credit card, pay cash for it, or use a HELOC depends on answers to above.

2) Home repairs- how soon do you need the roof? Is it leaking now?

3) Contacts- how immediate is this expense?

4) College loans- is interest due now? Or is loan in deferment? Is expectation you pay the loan or child pays the loan?

My next level of comments is the student loan belongs to the kid, not the parent. Loan should be in deferment for 4 years, so let kid pay it when it comes out of deferment.
If any expense can be delayed, that helps.

I would avoid taking out a HELOC if you have an income which can pay for things- it will probably be easier to find $500/mo of expenses to cut and you take on less risk by not tackling all expenses at same time.

There is more than one way to solve this-

One is borrow the money for all needs, then find a way to pay that money back over time. This is what you suggested.

Another is examine budget, look for free cash flow, and use that cash flow to pay for various items as you need to pay for them.

The risk with borrowing money is changing rates (HELOCS are usually adjustable rates) and in this case you might be financing a high amount of expenses some of which are not needed "now" which drives up your costs.

The gain of using cash flow is you pay cash for the items (less out of pocket cost), the con is you need time for the cash to accumulate for some of the larger expenses.

**dahoov2** · 08-03-2010, 10:43 AM

Originally posted by jIM_Ohio View Post

What income do you have to pay the debts?

1) List income -gross and net, monthly and yearly

We earn about 116k a year gross and like 75-79 (not sure exactly) net.

2) List expenses- your budget of all expenses per month
include annual expenses (like car registration and insurance) too.

My debts are not much. We owe like 32k on that student loan and our house will be paid off. Monthy bills are not that high. We owe like 3k on a credit card but we pay 1000 a month. That'll be paid off shortly.

do not include expenses you have not incurred (yet) like the contacts or vacation.

Here is my opinions with more questions:

1) Take the vacation. If you are losing your site, you get only 1 life, live it and take the vacation- whether you put the vacation on a credit card, pay cash for it, or use a HELOC depends on answers to above.

2) Home repairs- how soon do you need the roof? Is it leaking now?

YEP. They can for 50 bucks put a channel on the end of the gutter for a hundred bucks and it'll take us through another year.

3) Contacts- how immediate is this expense?

NOW.

4) College loans- is interest due now? Or is loan in deferment? Is expectation you pay the loan or child pays the loan?

My son cannot pay the loan; he's struggling to do the minimum on his stafford loan. So we have been paying the Sallie mae at about 1000 a month.

My next level of comments is the student loan belongs to the kid, not the parent. Loan should be in deferment for 4 years, so let kid pay it when it comes out of deferment.
If any expense can be delayed, that helps.

Alas, that cannot happen; we are housing him. He was out of work 14 months and went delinquent on phone, housing and incurred doctor bills. He's got a decent job now but had no car; so now he's paying everyone off. He'll be done Januray 2011 and will begin to save for his own place.

I would avoid taking out a HELOC if you have an income which can pay for things- it will probably be easier to find $500/mo of expenses to cut and you take on less risk by not tackling all expenses at same time.

Well since the house will be paid off, we would take that money (1000-1200, saving the other 300 for taxes/home insurance) and put that on the heloc. We would add in 500 a month for the student loans and that would put us at 1500-1700 a month to pay the heloc). We would take the credit card payment to make the car payment/additional insurance/property tax payment on that. It SEEMS like an even swap almost. My only problem is that the credit card would no longer be an option. We'd have to cut back on payments if we charged anything.... I feel like we lost a cushion?

There is more than one way to solve this-

One is borrow the money for all needs, then find a way to pay that money back over time. This is what you suggested.

Another is examine budget, look for free cash flow, and use that cash flow to pay for various items as you need to pay for them.

We currently have about 200-400 a month "extra". This is what we use to eat out, buy clothing, or go places on the weekends. I would hate to give that up, but I would cut back on eating out if I had to.

The risk with borrowing money is changing rates (HELOCS are usually adjustable rates) and in this case you might be financing a high amount of expenses some of which are not needed "now" which drives up your costs.

This is one of the things that worries me!!! That's one of the reasons I was unsure if I should find another solution. the good thing is my credit score is outstanding at 809 and my hubby has an 805. Our lowest score of all the bureaus is 797. I am also afraid to get a quote for a HELOC because my score now says "too many inquiries".

The gain of using cash flow is you pay cash for the items (less out of pocket cost), the con is you need time for the cash to accumulate for some of the larger expenses.

Thanks for your response. So, are there prepayment penalties? Also, if I got a HELOC, there is a yearly fee I heard about? Do they add that to the loan? Also if I borrow 50 would that fee be LESS than if I borrowed 100K? Lastly, where do I shop for this. I don't want 50 people running my credit report!

**jIM_Ohio** · 08-03-2010, 11:37 AM

Originally posted by dahoov2 View Post

Thanks for your response. So, are there prepayment penalties? Also, if I got a HELOC, there is a yearly fee I heard about? Do they add that to the loan? Also if I borrow 50 would that fee be LESS than if I borrowed 100K? Lastly, where do I shop for this. I don't want 50 people running my credit report!

There are not prepayment penalties... my point was this

If you borrow 80k and put 30k in bank for later, and spend 50k, you are paying interest on all 80k now, even though you did not need all 80k now.

HELOCs are usually "rolling" very similar to a credit card... meaning if you need 10k today, you get it, and pay interest on that 10k (and they calculate a minimum payment for you). If you pay back $1000 then borrow $3000 more, you have 12k and you are paying interest on that 12k.

Usually no pre-payment penalties, think of a HELOC like a credit card, but if you don't pay it, they are going to take your house away. (If you don't pay a credit card, they just take the card away and damage your credit, take a HELOC and not pay it, you will lose your house).

Usually there is an annual fee for a HELOC the same way there is an annual fee for some credit cards.

Usually that fee is fixed (it is not based on amount borrowed). Some people have HELOCs but do not borrow against it, and just pay $50/year for the chance that an emergency requires them to borrow money.

**disneysteve** · 08-03-2010, 11:43 AM

I never see options for "personal loans" or "second mortgages" It's usually HEL vs. Heloc.

A home equity loan IS a second mortgage. Just different terminology.

I need a new roof, a new car (my car is 11 years old and my son needs it to work in another city so I am stranded daily; I gave him my old car) and I am going blind slowly and have never traveled outside US/Mexico/Canada and it's my dream for a nice trip. Roof is about 7k, Trip about 10k, car about 25k and my special contacts will be about 2k. I need at minimum 43k.

If your grown son is gainfully employed, why didn't he buy his own car? As for getting another car, why does it need to cost 25K? You can get a very nice car for less than half that much. Buy a decent used car for 5-10K rather than a fancy new car for 25K, especially since you can't afford it and would have to take out a loan either way.

I have a Sallie Mae loan for my son that we owe 30-32k on.

Same question as with the car. Why isn't your son paying his own college debts? You shouldn't have to mortgage your home to pay off his education.

I agree with taking a trip to see the sights you've always wanted to see while you can still do so. Borrowing for that is understandable. Borrowing for a car or to pay off somebody else's education is not so understandable.

**dahoov2** · 08-03-2010, 12:09 PM

Originally posted by jIM_Ohio View Post

There are not prepayment penalties... my point was this

If you borrow 80k and put 30k in bank for later, and spend 50k, you are paying interest on all 80k now, even though you did not need all 80k now.

HELOCs are usually "rolling" very similar to a credit card... meaning if you need 10k today, you get it, and pay interest on that 10k (and they calculate a minimum payment for you). If you pay back $1000 then borrow $3000 more, you have 12k and you are paying interest on that 12k.

Usually no pre-payment penalties, think of a HELOC like a credit card, but if you don't pay it, they are going to take your house away. (If you don't pay a credit card, they just take the card away and damage your credit, take a HELOC and not pay it, you will lose your house).

I guess that's the biggest detriment to this type of loan, but in order to get that much, how else could you do it? Is there a loan product out there where you do NOT put your house as collateral? I am not worried about that really. My hubby has a retirement check from the military that would cover the entire mortgage. We would not lose the house I don't think.

Usually there is an annual fee for a HELOC the same way there is an annual fee for some credit cards.

That sucks. I have no annual fee on my credit card now. I see now though they are all starting to add that again.

Usually that fee is fixed (it is not based on amount borrowed). Some people have HELOCs but do not borrow against it, and just pay $50/year for the chance that an emergency requires them to borrow money.

If it's only 50 bucks a year, that's not bad but I was thinking it was several hundred which was making me nervous.

I guess I'll talk to a bank manager or something. I have a guy coming tomorrow to quote me on the roof. Two estimates so far from 7-10k (ouch). I am trying to work the system to get my contacts paid for by the military and I am trying to find the lowest cost car to meet my needs that is new and has the features I want. I am doing the hard work! Now I just need the best loan.

Thanks so much for that info. I read your first sentence here and panicked... but as I read on, it was a bit better. Hmmmm, maybe I should invest in lottery tickets!!!!

**jIM_Ohio** · 08-03-2010, 12:33 PM

I guess that's the biggest detriment to this type of loan, but in order to get that much, how else could you do it? Is there a loan product out there where you do NOT put your house as collateral? I am not worried about that really. My hubby has a retirement check from the military that would cover the entire mortgage. We would not lose the house I don't think.

This is why you should first look at a budget before getting a loan. As Steve pointed out, some of what you are borrowing for is not a good reason to borrow (car and kids college).

Focus on budget for a brief time and see if there is a way to fund some of the needs (for example 2k contacts should be in budget, you should not need a loan for this).

That sucks. I have no annual fee on my credit card now. I see now though they are all starting to add that again. If it's only 50 bucks a year, that's not bad but I was thinking it was several hundred which was making me nervous.

Negotiate- there might be HELOCs with no annual fee- you need to check- when I had a HELOC it had an annual fee- it was small though, so it was worth it.

I guess I'll talk to a bank manager or something. I have a guy coming tomorrow to quote me on the roof. Two estimates so far from 7-10k (ouch). I am trying to work the system to get my contacts paid for by the military and I am trying to find the lowest cost car to meet my needs that is new and has the features I want. I am doing the hard work! Now I just need the best loan.

Check your house insurance- it might cover a portion of the roof, and it might be better for house insurance to increase from $1000 to $1100 than it is to pay 10k to the roofer- its a decision, but should save you money short term.

**disneysteve** · 08-03-2010, 12:50 PM

Originally posted by dahoov2 View Post

I am trying to find the lowest cost car to meet my needs that is new and has the features I want.

Why? Why do you need a new car? You were driving an 11-year-old car until you gave it to your son. If you had oodles of cash to pay for it, I'd say to go right ahead, but you don't. You are talking about borrowing against your home to buy a car. Plus, you say you are going blind. Obviously, we don't know the details of your condition but do you have any idea from your doctors how long you will be physically able to drive? Why spend 25K on a car if a few years from now, your vision could reach a point where driving is impossible? Personally, I doubt I'll ever buy a new car again.

I'm having a bit of trouble following your responses since you posted them within Jim's quotes, but I think I've got it all now.

You and your husband earn 116K. What do you have in savings outside of retirement accounts? Why do you need to take out a loan to do a 7K roofing job or buy 2K contacts? Why do you owe 3K on your credit card? You say your monthly expenses aren't that high but it sounds like you have no money despite a comfortable income. I'm confused here.

**snafu** · 08-07-2010, 07:49 PM

I wonder if you realize that your son is not learning money management because you have looked after his current car needs and $ 32K loan. I wonder how you will pay for Sallie Mae, Trip, Roof, Car, CC borrowing...what ever the instrument used . If roof repairs aren't urgent could they wait until you return from your trip? Can the auto wait until you return? My suggestion would be son return your car and buy something affordable for himself with resultant payment responsibilities.

If you're determined to buy a new car, even though you lose 20% depreciation the moment you drive off the lot, go for 0% financing having 1st checked fees and add-ons using various terms.

**dczech09** · 08-08-2010, 07:29 AM

I really do not see what you're trying to justify. What you need to do is tell yourself that your focussing on NEEDS, not WANTS. You want a $25K car, you want to go on a $10K vacation, and you want to be able to send your son through school. This is no reason to put a second lien on your home.

The only thing that I could justify taking on a HELOC is for home improvements, so as long as the additional value you produce in your home is equal to or greater than the future value of the costs of the credit in the first place. What I mean is this: lets say you take on $10,000 for home improvements (such as your roof)and this results in a $15,000 increase in the value of your home over time. The total cost of your HELOC, principle plus interest, should not exceed that $15,000.

Going on vacation is fun and is sometimes needed to maintain sanity, however it does not add value to your home. Buying a $25K car and using HELOC monies to finance it is not a remotely smart idea, unless you're planning on moving into your car when you default. That expensive of a car will lose a lot of value the moment you leave the dealership; you are essentially underwater with your car loan from the start.

I suggest you sit down and figure out where your priorities are; what are your wants? What are your needs? Put everything into perspective and objectively determine your course of action. I may sound like a jerk, but I want to make sure I don't have to say "I told you so." Listen to everyone else on the forum here, they all have good insights.

**disneysteve** · 08-08-2010, 10:09 AM

Originally posted by dczech09 View Post

Buying a $25K car and using HELOC monies to finance it is not a remotely smart idea

I agree that this is a bad idea, as I've already said. For transparency, though, I did use a HEL to pay for my car. The reason I went that route was because at the time, the best car loan I could get was about 8%. The HEL was about 6% and the interest was tax deductible, making the real interest rate more like 4.5%. It was simply a financially better option to use the HEL than to use a car loan (4.5% vs. 8.0%). I was buying a used car, though, not a brand new one, and it was something that was very affordable given our income and overall budget.

**dczech09** · 08-08-2010, 04:34 PM

Yeah I see what you're saying DS. In that situation, using a HEL would be advantageous when its the lowest percentage. And actually these days, you're more likely to get a lower rate on home equity because the collateral rises in value. Also, the marginal premium over prime on home equity products is much lower than for say an auto loan. But still, I would argue that a good $5K to $10K car would be better than a $25K car; that is just too much debt with no enough benefit to offset risk.

**disneysteve** · 08-08-2010, 05:54 PM

Originally posted by dczech09 View Post

But still, I would argue that a good $5K to $10K car would be better than a $25K car.

Absolutely. I wasn't contesting that at all. For OP to consider a 25K brand new car doesn't make sense IMO.

Confused; what to roll into a HELOC and is the HELOC the way to go