Equity in home / HELOC

Banks will typically let you borrow 80%-90% of your homes equity through a HELOC. Let’s call it 85%. So if you have a $200k home, banks will lend you $200k x 0.85 = $170k if you own the home outright. Let’s say your mortgage balance is $100k, banks will lend you $170k - $100k = $70k in the form of a HELOC.

It essentially works like a credit card with a limit of $70k. It has simple interest like a credit card, but instead at a much lower rate like 5-6%.

There is typically a period of time like 10 years or so where you can “draw down” on your HELOC and the minimum payment will be interest only. After the 10 years, you must begin repaying the principal balance borrowed. And this repayment is set up like a typical mortgage over 10-20 years.

It’s a very useful tool.

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was this good advice?

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Depends on how much equity you initially established and what your score was.

HELOC doesn’t hurt you much but if you don’t need it right off the bat for home upgrades, I wouldn’t personally mess with one and rather focus on paying down principal.

Your closing costs on a HELOC are typically significantly less than a refi as well.

HELOC along with Roth IRA are the new “emergency” fund.

If you have a chance to open a heloc, do so.

There is 0 downside risk to having it active and available. No cost to open. No interest charged if you dont use it.

Like any loan or insurance policy, a bank will not want to give it to you when you desperately need it (out of work, in the middle of home repairs that are exceeding cost estimates, etc..)

I'm not getting into the benefits of a traditional 1st mortgage vs a heloc. That is a different discussion with different goals, variables, moving parts. But at 0 cost, 0 interest charged if you dont use it... why not open the heloc?

my HELOC required a $2500 initial withdraw on a $125k line of credit

if your just doing it for shits and giggles there’s a good bit of paperwork involved, an appraisal needed, and closing

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my HELOC required a $2500 initial withdraw on a $125k line of credit

if your just doing it for shits and giggles there’s a good bit of paperwork involved, an appraisal needed, and closing

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That isnt normal for most HELOC.
I could see that as a requirement for a rate reduction (which in the end isnt a bad thing. Just payoff the initial draw and keep the better rate).

Most HELOC dont do field appraisals. So it isnt an inconvenience.
Most HELOC dont even need a lot of income/asset docs (there is a form that produces W2s to the underwriter). If the credit score is good enough and the desktop appraisal shows equity, it is often a piece of cake.

My last HELOC didnt even use an attorney for closing.

All I did was confirm the amount I wanted and showed up to close at the local bank. The bank did all the legwork and had everything ready in 1 business day.