Millions of Americans have Home Equity Lines of Credit. Properly used they can play a meaningful role in a family’s financial life. Many families bought their home using a piggyback loan, getting an 80% Loan-to-Value (LTV) 1st combined with a HELOC to provide the balance of the financing.
They are also frequently used to buy a car in lieu of bank financing or to finance a home improvement like an addition or a re-modeling project. Another good use is to pay off high rate credit card debt and replace it with debt on which the rate is lower and the interest tax deductible.
The rate on virtually all HELOCs is tied to the Prime Rate, just lowered to 7.75%. For the first ten years, typically, the required monthly payment is the interest that accrued during the month. However, on all HELOCs it is equally important to have a repayment plan whereby the principal is re-paid so that the balance is ultimately zero.
If you paid off credit cards with a HELOC, for example, when you just pay the interest, there you are after ten years having paid $6.00 per gallon for gas if you include the interest you paid. Or the cost of that $50 dinner turns into $100. For that reason, these are not loans for the people who have no discipline.
There is another danger, having you account frozen if you don’t make a payment on time. A client of mine got a $75,000 HELOC as part of his financing when he bought his home. Being a diligent person, he had paid it down to $25,000 in the few years he has owned the home. But when his vacation was unexpectedly lengthened due to unforeseen circumstances, he missed making his monthly payment on time. It was made on the 25th of the month, past the 15 day grace period.
He was just expecting to pay a late charge but found that his lender had frozen his account and he was no longer able to take advances, ever. Wow! I talked with other HELOC lenders and they have similar policies. One institutes a soft-freeze after the 15th day. That can be removed when payment is received. But they institute a hard freeze after 30 days and you need to tell a convincing story to a supervisor to get it re-instated. I suppose of they don’t like your story, it will be frozen forever.
This is very harsh treatment when you consider that these same institutions were falling all over themselves a few years ago to get everyone in America to get a HELOC.
With this knowledge if you have a HELOC it is important that you understand the lender’s policy. First check your loan document, sometimes called a Credit Agreement. Then, with that in hand, call your lender’s 800 number and talk with Customer Service to find out their policy. Then be sure you don’t get cross-wise with them. It could be painful.
Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower
articles. Randy is a mortgage broker who has financed over $1 billion
in properties. He writes about home buying and real estate finance
topics for CreditBloggers.com.
Randy Johnson Randy is a Credit.com contributor and seasoned mortgage expert. He writes about home buying, mortgage laws and real estate finance issues. He has financed over $1 billion in properties, is the author of How to Save Thousands of Dollars on your Home Mortgage and he is a feature columnist for Savvy Borrower.
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Trackback on HELOC information.
http://www.zulit.com/2007/11/09/canadian-heloc-interest-rates-variable-or-fixed/