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Actually, many lenders only allow HELOCs up to 80% - 90% LTV, not 100% LTV. If you are going to take the initial draw at closing to use for home improvements, they may may (or may not) allow the value of the home on the expected value after the improvements are completed, but you generally have to have a contractor's bid to show the improvements that will be done, and that the cost, plus other liquid funds you have will be at least as much as the bid plus a an overrun factor.

This is a home repair, not a home improvement. Please see my reply to PSU for details. What I meant to say, if it wasn't clear, is that I owe slightly less than 33% of the estimated value of the property on the primary mortgage. I would plan on only applying for another 33% of that value for the HELOC, maintaining equity in the remaining 33%.

Will the draws for the fixed HELOC be amortized over the remainder of the draw period plus the 5 years repayment period, no matter how many draws you take? Or will each draw be amortized over the 5 year repayment period, so you could end up with several different sub-loans, each amortized over 60 months, if you take multiple draws during the draw period? That's important to understand, especially if you are looking at using this for something like living expenses during unemployment.

I would be making monthly interest + 1% principal payments on the outstanding balance during the draw period, and then the balance would be amortized over the repayment period. The adjustable rate would adjust quarterly. There's no prepayment penalty and the goal would be to pay back all funds drawn in full as quickly as possible so that there would be little or now balance remaining at the close of the draw period.

Tied to prime as in 'equal to the prime rate' or as in 'equal to the prime rate minus 0.5%', 'equal to the prime rate plus 0.5%' or something similar?

The adjustable rate is equal to prime, with a minimum floor of 4%. So the rate will start out at 4% since the current prime rate is currently 3.25%. So the Fed would have to raise the rate above 4% before the adjustable rate would change.

Closing costs for a HELOC? You might want to shop around....

$255 for the appraisal since it's been 6 years since the credit union refinanced the primary loan, and $375 for loan costs.

Do you have the option of moving the adjustable amount to a fixed rate later? If so, I'd probably go for the adjustable.

After the 10 year draw period, the outstanding balance would automatically convert to a 7 year amortized repayment period at the current adjusted rate. However, in 6 years, I will be able to access my retirement savings, which have grown considerably during my 20 years at The Motley Fool, should I have any difficulty paying back the the outstanding balance. But as I said previously, my plan is to prepay balances during the draw period rather than carry them into the payment period.

If not, since Prime is 3.25%, it would only take four 0.25% steps or two 0.5% steps for the adjustable to increase above the fixed. So it's a gamble of which one you think will allow you to pay less in interest overall. That will depend on how long you think it will take you to pay off the money you will take out, which will require you to make guesses on how long you think the prime rate will stay at the current rate and how much you think you are going to borrow. So, despite the fact that you don't want to try to guess, you should probably run a few different scenarios that you think are likely to see which one will result in paying less interest.

This, of course, is the guessing game. It would take 4 quarter-point increments before the adjustable rate would rise above the 4% floor, and 8 quarter-point increments before it rises above the 5% fixed rate. This is one reason why my plan is to not carry any of the debt any longer than I have to. That's why I was looking to see how other Fools were looking at the future of interest rates.

My gut instinct is that the pandemic and the economic impact is going to be around for the next few years, and then the Fed is going to go slow after that to avoid overreaction to its actions. So I think I have some margin of safety for the next 3-5 years as far as the prime rate is concerned. I would like to hear from any Fool who thinks I am misguided in that view.

Keep in mind that the repayment period is the maximum time period after the draw period ends that the lender will allow for you to pay the loan off. Nothing keeps you from paying the loan off during the draw period by making bigger payments than the minimum required.

So in reality, the fixed HELOC loan only has a 10 year total length, while the adjustable has a 17 year total length. So, if you are wanting to keep your HELOC options open as long as possible, that would make the adjustable loan the more attractive option.


The intent is to not carry a balance any longer than I have to. I am looking at it more like a promotional credit offer, where I will try to pay the balance down as quickly as possible. For example, assuming rates don't rise over 4% in the next year (I think a safe bet), if I drew down $10k for the new HVAC, I would look to pay it back over the course of 10-12 months at a cost of $218 in interest. This would be like a 12 month 0% credit card promotion with a 4% fee.

If I were to go back into an extended period of unemployment and build up a balance, in the worst case, I would be able to tap retirement savings in 6 years to pay off the remaining debt. For the Fixed HELOC, that would mean one year in the payment period, and for the Adjustable HELOC, I'd still have 4 additional years in the draw period.

Fuskie
Who hopes he addressed all your questions and takes note of and greatly values your observations...

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