Why I want to be the bank
HELOCs are typically interest only loans, which means the monthly payments you make do not count towards principal. Banks want to push you to the limit on your monthly payments because it will ensure that you make few payments on the HELOC, which means more $$$ for them, a LOT more! Let the numbers speak for themselves...
* Assumes that no principal is paid off on HELOC.
Some additional notes... We have a five year plan for our home. The HELOC rate fluctuates monthly, so these numbers are too small. If we close the HELOC within three years we have to pay an additional $1000. The minimum account charge for the HELOC is $375 if you have no balance...
The initial HELOC payment was $235, it is now almost $300 and continuing to rise because its tied to prime...
Interest only loans aren't always bad and I would consider one if the interest rate wasn't variable and I was very, very, very, very sure that the value of the home would increase in the future.
* Assumes that no principal is paid off on HELOC.
Some additional notes... We have a five year plan for our home. The HELOC rate fluctuates monthly, so these numbers are too small. If we close the HELOC within three years we have to pay an additional $1000. The minimum account charge for the HELOC is $375 if you have no balance...
The initial HELOC payment was $235, it is now almost $300 and continuing to rise because its tied to prime...
Interest only loans aren't always bad and I would consider one if the interest rate wasn't variable and I was very, very, very, very sure that the value of the home would increase in the future.
posted by M @ 6:34 PM
7 Comments:
At 3/07/2006 10:24 PM,
Anonymous said…
great idea for the site on personal finance help..
maybe my brain's fried from working too many hrs, but I didn't understand this post...maybe if you dumb down for me, i'll understand?
At 3/08/2006 11:32 PM,
Anonymous said…
yeeaaaaa.......ok, i got the first two tables but i can't figure tables 3 and 4. Not sure how the interest paid on the last table is derived. Is that mortgage interest or heloc interest? hmm i'll wait for an update.
If numbers are right, looks like I'd be paying more than 2 times if i took the 0% instead of the 20%.
At 3/27/2006 2:28 PM,
Anonymous said…
correct me if i'm wrong...but if you switched the mortgage and heloc amounts around (assuming interest rates remain fixed so you're getting lucky on the HELOC) then with HELOC at $240K and mortgage at $60K, you'd be saving a LOT on compounded interest.
The question is, why aren't ppl going for HELOC rates then? Of course there's a the interest volatility risk...but beside that, is there a maximum HELOC loan amount? Seems like I'd want my whole loan under HELOC rather than a mortgage
Then it says no principal paid off on HELOC. What happens to that principal...when does it get paid off? If you have to worry about the principal then HELOC may be less attractive than what I think it is right now..
At 3/27/2006 2:31 PM,
Anonymous said…
actually, even when paying off the full principal at the end of 5 years on the HELOC, it's still a lot better than mortgage cuz the interest doesn't compound. So....why not take a bigger HELOC loan?
At 3/28/2006 11:27 PM,
M said…
Re Peter: If you only make the interest only payments on the HELOC, the loan will persist until the property is sold. You will be paying that $$$ forever. A traditional mortgage will be completely paid off after a period of time. The interest payments are spread out over a 30 year period, the more principal you pay off, the less interest you pay. Hope this helps... Mikey
At 3/28/2006 11:33 PM,
M said…
Re Peter: The table shows that after 5 years you would pay $14,374 in interest in addition to the principal of $50,000. Keep in mind that the interest rate on HELOCs are tied to prime, and adjust monthly(Fed has been raising rates). That interest rate drives the monthly payment. Our initial payment was $287, its up to $360 now... Our initial rate was 5.75%, the current rate is even higher than 7% now.
Mikey
At 4/10/2006 2:46 PM,
Anonymous said…
Well, I guess there are a few ways to look at the big picture and figure out what is best for you. But for now, let us just assume that you are going to stay in the house for the next 30 years and complete the payments as scheduled with 0% down.
Scenario I. $240K LOAN (30yrs) & $60K HELOC (5yrs)
(i) If you were to take out a $240K loan at 5%, the monthly payments would be $1,288.37. The total paid on the $240K loan after 30 years (360 payments) would be $463,813.20. (ii) The monthly interest-only payments on the $60K HELOC at 6.99% would $349.50. The total paid in interest on the HELOC after 5 years (60 payments) would be $20,970. (iii) Repayment of principal on HELOC after 5 years is $60,000.
TOTAL PAID AFTER 30 YEARS = (i) + (ii) + (iii) = $544,783.20
Scenario II. $300K LOAN (30yrs)
Now, if you were to take out a $300K loan at 5%, the monthly payments would be $1,610.46. The total paid after 30 years (360 payments) would be $579,765.60.
As you can see, the total difference paid between the two scenarios is $34,982.40. However, you have to factor in what that ~35K "saved" costs you. Through year 5, you have paid 60 x $1,610.46 = $96,627.60 in Scenario II while you have paid 60 x ($1,288.37 + $349.50) = $98,272.20 plus an additional $60K is due on the HELOC, so $158K out-of-pocket in Scenario I.
By year 5, you are looking at a remaining principal balance of roughly $220K in Scenario I, or $80K in equity (after paying $60K towards the HELOC). In Scenario II, there is roughly $275K remaining on the $300K loan by year 5. But if you expect to have an extra $60K as in Scenario I, you could use that $60K to pay down a portion of the remaining principal and you would realistically have $85K in equity in Scenario II, no? Not only that, but you would have also paid $1,644.60 less in Scenario II along the way ($98,272.20 - $96,627.60).
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