Input on loan VS. Line of credit please

[The_Eric]

We are consolidating the remainder of our debt (mortage and cc) and switching from a small local bank chain to a small local credit union chain. My wife was talking about a few home improvements we'd like to do, so the gal behind the desk suggested a line of credit. At first it sounded like a good idea, but I'm not so sure now...

The loan would be 4.4??% with about $1000.00 in fees associated with paperwork and so on. The line of credit would be 2.24% until June, then up to 4.24% and variable after that but no closing costs and wouldn't have to pay on an arbitrary amount.

The gal is trying to get us to go with the line of credit, but I don't trust her, nor would trust anyone who stands to benefit from my debt. I like the the lower interest, the no closing costs and only paying on what is borrowed, but I'm not real hot on the variable interest... At all. Also, how are they going to recover their money on the line of credit vs. the loan? Besides the variable interest, what is the catch?

I know we have some pretty financially savvy members here and this is really my first time involving a bank note like this- the house has always been in my wife's name and she has always handled it, so I would appreciate any input here!!!

 

[Bandito440]

Have you done the math to ensure it'll benefit you to refinance the mortgage? What's your current balance, interest rate, and time left on the loan?

Interest rates have only up to go, so be aware that your variable rate loan will likely be increasing over time.

In general, I'd rather see people save for renovations that pay someone else interest for the sake of getting them done earlier. Get yourself a savings account and make deposits from every paycheck. Earn interest rather than paying it.

Further thoughts:

If you're consolidating credit card balances, you can't afford home renovations right now. Those should be paid in full every month. Some budgeting and reprioritizing is in order.

 

[FirstNissan]

I agree 100% with Bandito, if you have credit card debt then you do not have money for any home renovations. Pay off your bills first then worry about making the house look pretty and getting yourself into another deep hole of debt. Time to sit down with the wife and have a heart-to-heart about your combined debt.

 

[supton]

I would say, run the numbers, figure out what each option will cost you. I wouldn't be a fan of variable interest rate either.

Could you cash out some of your house value instead? Refi with cash out?

 

[ARCOgraphite]

Know that you can't write off (1040 FED TAX) any C.C. debit on a HELOC loan. Big personal finance rule is to never "mortage" a CC balance.

I have a 125K$ HELOC and it has worked well for me in its intended purpose during an unstable financial and jobs climate. I secured it JUST before I was laid off in 2008.. Nice 2.74% variable interest only. Funny, I was just thinking on the toilet last night about getting a FIXED 15 year Mortgage now that interest rates will be rising. Note; I eventually got a "bridge to retirement" job in 2010. Not what I was making as a Sr. Dev Engineer, but better than a Wallymart greeter

 

[ARCOgraphite]

I assume the OP is talking about a HELOC not personal loan. The personal loan shouldnt have any substantial origination fees associated. He said ~ 1K bucks.

IDK of any unsecured loans for under 5%! Usually 10-20%.

 

[maverickfhs]

Originally Posted By: Bandito440
Have you done the math to ensure it'll benefit you to refinance the mortgage? What's your current balance, interest rate, and time left on the loan?

Interest rates have only up to go, so be aware that your variable rate loan will likely be increasing over time.

In general, I'd rather see people save for renovations that pay someone else interest for the sake of getting them done earlier. Get yourself a savings account and make deposits from every paycheck. Earn interest rather than paying it.

Further thoughts:

If you're consolidating credit card balances, you can't afford home renovations right now. Those should be paid in full every month. Some budgeting and reprioritizing is in order.


+100, variable rates are very tricky and are only good if 'one' has the means to pay off the loan quickly. Otherwise, it can be a big challenge. Mortgage debt is inevitable for 'majority' of us. CC debt and renovations, can sometimes fall into the category of luxury.

Run a few numbers utilizing amount(owed or planning to borrow) and interest and then take it from there.

 

[KrisZ]

Another +1 for paying off CC debt first and not getting any loans for the renos at all. But this means delay in beautifying the house, so a lot of times the female counterparts don't like this course of action.

 

[Pop_Rivit]

Originally Posted By: The_Eric
(mortage and cc)


Pay the credit cards off first, and then work on self discipline before you dive into additional debt. For the improvements, save up for them or do them a little at a time when you have the extra cash.

 

[emmett442]

+1 Ditto on the above.

 

[Alfred_B]

Originally Posted By: The_Eric
We are consolidating the remainder of our debt (mortage and cc) and switching from a small local bank chain to a small local credit union chain. My wife was talking about a few home improvements we'd like to do, so the gal behind the desk suggested a line of credit. At first it sounded like a good idea, but I'm not so sure now...

The loan would be 4.4??% with about $1000.00 in fees associated with paperwork and so on. The line of credit would be 2.24% until June, then up to 4.24% and variable after that but no closing costs and wouldn't have to pay on an arbitrary amount.

The gal is trying to get us to go with the line of credit, but I don't trust her, nor would trust anyone who stands to benefit from my debt. I like the the lower interest, the no closing costs and only paying on what is borrowed, but I'm not real hot on the variable interest... At all. Also, how are they going to recover their money on the line of credit vs. the loan? Besides the variable interest, what is the catch?

I know we have some pretty financially savvy members here and this is really my first time involving a bank note like this- the house has always been in my wife's name and she has always handled it, so I would appreciate any input here!!!


I'm asssuming it's a HELOC -- home equity line of credit.

It works very similar to a credit card. You will have a credit limit and you can draw up to that amount. Then you pay it down with monthly payments. Some banks even give a card that you can make purchases with.

It differs from a credit card in two ways --

1. the debt is collateralized by the equity, or the portion of the house you own. So if you don't meet your contractual obligations then the bank can repo the house. Credit Cards are not secured by a collateral. Because of this, the interest rate is lower than a CC.
2. Because this is like taking a mortgage on your house, the interest you pay on the HELOC is a deduction on your taxes just like your mortgage interest.

If you don't mind the increased risk of repossession then it makes much more sense to avoid a credit card debt and incur a HELOC debt for the remodeling.

 

[CT8]

Noooooooo! all you are doing is taking an unsecured debt and rolling it to your house which is a long term debt that makes it a looooooooser deal. The problem is you are living beyond your means if the cc debt is other than medical debt and there are other ways to fix that. Quit spending, get an extra job to pay down the debt, sell stuff you do not need . Consolidated debt is still debt get out of the debt by making life style changes [again live with in your means]. Do not consolidate debt eliminate debt which you are not doing. All you will do is opening the door with a 0 balance cc to buy more things that will get you into more debt.

 

[tgrudzin]

You only pay interest on the balance of the HELOC. If you take a loan, you are borrowing and paying interest on the full amount you borrow. Say, $50K. If you take a HELOC for $50K, but only need 22K to pay bills and home remodeling and such, your are only paying interest on the $22K you borrowed.

And it is tax deductible if you itemize.

 

[supton]

Originally Posted By: tgrudzin
You only pay interest on the balance of the HELOC. If you take a loan, you are borrowing and paying interest on the full amount you borrow. Say, $50K. If you take a HELOC for $50K, but only need 22K to pay bills and home remodeling and such, your are only paying interest on the $22K you borrowed.

And it is tax deductible if you itemize.


Ah, thank you. I've contemplated a HELOC for home improvements.

 

[IndyIan]

We built our house with a line of credit on our land, to avoid a building mortgage. We have now paid off the line of credit and try not to dip into it, but its an easy way to pay off the odd month of high CC spending while maximizing your savings returns. With the LOC you can budget your monthly savings very high with little spare money floating around for "just in case", because most months there is no unexpected spending and building up $5-10k getting zero interest in a chequeing account is a waste. (although you might get to buy more toys!)
From now on I don't think we'll mess around with specific loans for large purchases, just pay out of our line of credit and repay at whatever schedule makes sense for us each month.

 

[SatinSilver]

If you get a new loan or line of credit and default, your home will be lost. Which isn't the case right now if you don't pay off the credit cards.

New option = lose home possibly

Current situation = no risk of losing if ccs aren't paid. Just giving worst case scenario.

 

[The_Eric]

First, the card is cut and not soon, if ever to return.

Second, I understand paying high interest debt first- but why not slash it's interest way down by rolling it into the house?

Doing so would allow our money to be much more effective, which would allow us to pay off all debt sooner than we would otherwise. Sooner, and at lower interest is better, right?

 

[Bandito440]

You need to figure out the overall cost to you. What are the fees associated with each option? What are the balances and interest rates of all outstanding debts?

You might be better off making maximum payments to whichever has the highest interest rate and minimum to all others rather than paying fees for a new loan. There's insufficient information here for us to help you.

 

[The_Eric]

Originally Posted By: Bandito440
You need to figure out the overall cost to you. What are the fees associated with each option? What are the balances and interest rates of all outstanding debts?

You might be better off making maximum payments to whichever has the highest interest rate and minimum to all others rather than paying fees for a new loan. There's insufficient information here for us to help you.


I appreciate your reply (same as everyone else's), but really I think I offered too much info to begin with. Really, I was only asking about the LOC vs loan but I got rambling and added the other info which really wasn't part of the question- and of course got input on that too.

However much we choose to finance, we won't be doing it with the LOC. If we had the ability to repay very quickly to avoid the interest rate hike, then we would likely do that instead.

 

[veryHeavy]

Originally Posted By: The_Eric
My wife was talking about a few home improvements we'd like to do, so the gal behind the desk suggested a line of credit.
No.
Your wife needs to learn to SAVE FIRST if she wants something, and then pay cash with 0% credit cost. Yes I listen to Dave Ramsay on the radio.

Also as I just posted in another thread:
- "A house is not an investment" according to Nobel Prize winner Robert Shiller. It is a monetary loss like a car or TV or any other appliance.