HELOC for dummies

[littlebird]

My husband and I are looking into a HELOC. We closed on our house in May 2014. We owe $231k, house is valued at $310k. We're looking to borrow $20k. 

Wells Fargo now owns our mortgage and from what I've read on the forums, they aren't too favored upon when it comes to HELOCs (or anything). We wouldn't qualify with them anyway because our LTV is almost exactly 80% (to be honest, I don't really know what this means). 

From reading through other threads, it seems that US Bank will consider LTVs of 85%. 

My questions are:

1) most of what I've read is that the variable interest rates aren't like credit cards. They can't suddenly skyrocket--they are somewhat controlled. Is this true? Can someone explain in laymen's terms?

2) According to the US bank calculator, the HELOC payment for a 20k loan is $74.83 for a variable APR of 4.49%. Does this sound about right? If this is right, we could afford to take out a $30k loan for $112.25 and do even more remodeling to the house. Is this ill-advised?

3) Do these payments get rolled into your mortgage or is it a separate payment altogehter? 

4) What are the major risks I need to be aware of with a HELOC? US Bank?

I really appreciate all the help. 

Thanks!

[ShanetheMortgageMan]

HELOC rates are based on the Prime rate.  The Prime rate is tied to the federal funds rate, this is the rate that the feds increase/decrease occasionally (although it's remained at 3.25% since end of 2008).  You can view the Prime rate history at http://www.fedprimerate.com/wall_street_journal_prime_rate_history.htm.  The rate on a HELOC is the Prime rate + a margin, which together equals the interest rate you borrow the funds at.  HELOC's usually have an interest only payment during the "draw period" (the time where you can access funds from the HELOC) and then change to an amortizing payment during the "repayment period" (where you can no longer access funds from the HELOC).  Often it's a 10-year draw period and 20-year repayment period, although the amount of time can vary lender to lender.

Taking funds out of the equity in your home for home improvement is usually the best use of HELOC funds.  Depending on what exactly you intend on doing and how much value it'll add to the home would determine if it's a wise financial decision.  There isn't exactly a value you can pin to increased enjoyment in your home due to the improvements.

The payments are paid separately from your 1st mortgage payment.  A HELOC is considered a 2nd mortgage, so you will have two separate mortgage payments.

HELOC's often report as revolving debt, so maxing out a HELOC can impact your scores just like a maxed out credit card.  The rates, as you have seen from the link above, are subject to change.  A lot of lenders offer you to "lock in" a portion or all of the funds you've withdrawn at a specific interest rate (usually higher than the Prime rate + margin), so in case you think rates will increase in the future that is one way to prevent them from doing so.

PNC Bank, US Bank, Wells Fargo, Bank of America, Chase are all fine lenders to get HELOC's from.  The process is usually pretty simple, rarely are fees charged, and sometimes an appraisal isn't even needed.

[littlebird]

Thank you so much for the thorough response. 

Does that mean typically you get a line of credit larger than you actually need to avoid the maxing out/credit impact?

We are making our home more energy efficient--hurricane impact windows, new a/c and ducting so it should definitely improve the value of our home. We also want to redo a bathroom. Previous owners removed a bathtub and built a shower without proper structural support so we want to restore the original layout and put the bathtub back in and demo the shower. 

[ShanetheMortgageMan]

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@littlebird wrote:

Does that mean typically you get a line of credit larger than you actually need to avoid the maxing out/credit impact?

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That would be one way for the utilization not to kill your scores.

The improvements you mention should improve your value, and should make it more enjoyable to live in.  It won't increase the value as much as adding an extra bedroom or bathroom would though.

[StartingOver10]

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@littlebird wrote:

Thank you so much for the thorough response. 

Does that mean typically you get a line of credit larger than you actually need to avoid the maxing out/credit impact?

We are making our home more energy efficient--hurricane impact windows, new a/c and ducting so it should definitely improve the value of our home. We also want to redo a bathroom. Previous owners removed a bathtub and built a shower without proper structural support so we want to restore the original layout and put the bathtub back in and demo the shower. 

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If you are in Florida, hurricane impact windows add great value to your home. For one, it reduces your annual insurance costs as long as the whole envelope is treated. Talk with a wind mitigation inspector so you don't miss any areas. The most common areas that people forget about are 1) front door sidelights and 2) garage door isn't upgraded to hurricane grade. As a result of hurricane impact windows it makes your home much more saleable too.

[juggalo9er]

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@ShanetheMortgageMan wrote:

HELOC rates are based on the Prime rate.  The Prime rate is tied to the federal funds rate, this is the rate that the feds increase/decrease occasionally (although it's remained at 3.25% since end of 2008).  You can view the Prime rate history at http://www.fedprimerate.com/wall_street_journal_prime_rate_history.htm.  The rate on a HELOC is the Prime rate + a margin, which together equals the interest rate you borrow the funds at.  HELOC's usually have an interest only payment during the "draw period" (the time where you can access funds from the HELOC) and then change to an amortizing payment during the "repayment period" (where you can no longer access funds from the HELOC).  Often it's a 10-year draw period and 20-year repayment period, although the amount of time can vary lender to lender.

Taking funds out of the equity in your home for home improvement is usually the best use of HELOC funds.  Depending on what exactly you intend on doing and how much value it'll add to the home would determine if it's a wise financial decision.  There isn't exactly a value you can pin to increased enjoyment in your home due to the improvements.

The payments are paid separately from your 1st mortgage payment.  A HELOC is considered a 2nd mortgage, so you will have two separate mortgage payments.

HELOC's often report as revolving debt, so maxing out a HELOC can impact your scores just like a maxed out credit card.  The rates, as you have seen from the link above, are subject to change.  A lot of lenders offer you to "lock in" a portion or all of the funds you've withdrawn at a specific interest rate (usually higher than the Prime rate + margin), so in case you think rates will increase in the future that is one way to prevent them from doing so.

PNC Bank, US Bank, Wells Fargo, Bank of America, Chase are all fine lenders to get HELOC's from.  The process is usually pretty simple, rarely are fees charged, and sometimes an appraisal isn't even needed.

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@ShanetheMortgageMan wrote:

HELOC rates are based on the Prime rate.  The Prime rate is tied to the federal funds rate, this is the rate that the feds increase/decrease occasionally (although it's remained at 3.25% since end of 2008).  You can view the Prime rate history at http://www.fedprimerate.com/wall_street_journal_prime_rate_history.htm.  The rate on a HELOC is the Prime rate + a margin, which together equals the interest rate you borrow the funds at.  HELOC's usually have an interest only payment during the "draw period" (the time where you can access funds from the HELOC) and then change to an amortizing payment during the "repayment period" (where you can no longer access funds from the HELOC).  Often it's a 10-year draw period and 20-year repayment period, although the amount of time can vary lender to lender.

Taking funds out of the equity in your home for home improvement is usually the best use of HELOC funds.  Depending on what exactly you intend on doing and how much value it'll add to the home would determine if it's a wise financial decision.  There isn't exactly a value you can pin to increased enjoyment in your home due to the improvements.

The payments are paid separately from your 1st mortgage payment.  A HELOC is considered a 2nd mortgage, so you will have two separate mortgage payments.

HELOC's often report as revolving debt, so maxing out a HELOC can impact your scores just like a maxed out credit card.  The rates, as you have seen from the link above, are subject to change.  A lot of lenders offer you to "lock in" a portion or all of the funds you've withdrawn at a specific interest rate (usually higher than the Prime rate + margin), so in case you think rates will increase in the future that is one way to prevent them from doing so.

PNC Bank, US Bank, Wells Fargo, Bank of America, Chase are all fine lenders to get HELOC's from.  The process is usually pretty simple, rarely are fees charged, and sometimes an appraisal isn't even needed.

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Glad the word dummies is in this post...makes me feel safe posting. Shane i am wondering at what point in equity can you do this and what valuation the heloc goes off of.

[ShanetheMortgageMan]

The valuation method a HELOC uses is usually either an AVM (automated value model, think Zillow.com) or an appraisal, it depends on the bank offering the HELOC.

If it's a primary residence, then usually you can get HELOC's up to 90% of your home's value

[littlebird]

I spoke with US Bank and they told us we could get 85%-90% of our home's value--so $32k-$48k. I asked the representative about maxing out the credit line and how it impacted credit and she told me it should have no impact. Is that true?

I was also told there were variable and fixed rates available (both without closing costs or fees). The variable rate had a flexible payoff schedule (you can choose 5 years or 20) whereas the fixed rate is 20 years. I'm wondering if both options are available what the advantage would be to choosing the variable rate other than the payoff schedule?

[ShanetheMortgageMan]

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@littlebird wrote:

I spoke with US Bank and they told us we could get 85%-90% of our home's value--so $32k-$48k. I asked the representative about maxing out the credit line and how it impacted credit and she told me it should have no impact. Is that true?

I was also told there were variable and fixed rates available (both without closing costs or fees). The variable rate had a flexible payoff schedule (you can choose 5 years or 20) whereas the fixed rate is 20 years. I'm wondering if both options are available what the advantage would be to choosing the variable rate other than the payoff schedule?

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Depends on how it reports, if it's a revolving line of credit then I'd say yes it would. 

The rate on the variable is likely lower.

[juggalo9er]

my home appraised for 85k thru va, zillow shows 68k....i quit lol