HE loan or HE LOC - what do you prefer?

Discussion in 'The Pub' started by Smacky the Frog, Mar 4, 2015.

  1. Smacky the Frog

    Smacky the Frog Silver Supporting Member

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    What and why do you prefer a loan over a line of credit or vice versa?

    Back story is one part of our house needs the foundation repaired. That's a nice- sized cost in and of itself. I also need two flat roofs redone. I'm looking at 40k of which I have half on hand in cash. Not sure what is the better option, a loan or line of credit.

    The girlfriend prefers a bigger loan in order to address other issues while I'm leaning towards a line of credit as some of the other work I believe can be put off for a while
     
  2. GuitarGuy66

    GuitarGuy66 Member

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    With a HELOC, once you pay it off it's still available. That can be a good or bad thing.
     
  3. bt2513

    bt2513 Member

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    Banker here. How long do you need to repay $20k? That should be the primary driver of your decision.
     
  4. Last Nerve

    Last Nerve Supporting Member

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    Banker here as well.
    IME, a HELOC is almost always a lower interest rate through my institution.
    It is also revolving, as you mentioned, meaning you don't have to come back and see me again (the revolving aspect is ten years and one month, then the balance locks into a loan) should something else come up down the road.
    Most of my clients are after the lower interest rate, rather than the full understanding between the HE Loan and the HELOC.
    Under the HELOC umbrella, you can also get a "Fixed Rate Advance," so if you're committed to a certain amount, that can be your loan 'inside' the line, and you'll have an even lower interest rate for the first year on that advance amount.

    Hope that helps.
     
  5. Smacky the Frog

    Smacky the Frog Silver Supporting Member

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    Thanks all. The 20k part I'm not really concerned with. It can be paid off within a year or eighteen months.

    The certainty is within a year or two (or three...) there's a kitchen and bathroom reno that'll need to be done. That will most certainly not be 40k, probably double that (or more).

    This is where I lean towards the HELOC, since I'm not sure when those projects would be done.
     
  6. bt2513

    bt2513 Member

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    HELOC - you won't get the benefits of a fixed rate if you are paying it off that soon. Any closing costs (and they should be minimal to zero in today's environment) will be unrecoverable for the loan - at least with the line you will have the added benefit of using at again in the future. Here in NC, HELOC deeds of trust are good for 15 years.

    I generally counsel customers who need 5+ years to repay the loan to go with a fixed rate term loan. A customer in that position will usually carry a balance on a HELOC for years and years even with the best intentions of paying it off sooner.
     
  7. bluwoodsman

    bluwoodsman Member

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    Some good thoughts here, but I would suggest you shop around. I've been a credit union member (sorry bankers) for years and have found they have had better terms and more flexibility for loans. Rates of loan interest (and rates of earned interest) aren't better at credit unions than banks (as used to be the case) but their loan terms and flexibility can sure be.

    We've used a heloc to help with everything from kids college expenses to used car purchases to home remodeling. Ours doesn't expire and convert, the minimal payment amount are super low (too low if you count on them to actually pay off in a reasonable time but great for temporary use when you intend to pay it all off soon), and they have been willing to set payments up anyway we want. Floating interest rate so you have to watch that, but it can be converted anytime.

    The one thing which I am not sure has been mentioned is what a HELOC does to credit rating. I think (but am not certain) that can be an issue depending on your age and credit history--if you will need to have a good rating to get major credit, a mortgage, etc. in the near future. We are approved for up to 25K but only have 3-8k out at any one time. But the full 25K shows up as an obligation on the credit report in some fashion, I believe--maybe someone with more knowledge than I can address that.
     
  8. AZChilicat

    AZChilicat Member

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    Don't forget one of the primary differences: lump sum with interest on the entire nut vs. draw down as needed and interest paid only on the outstanding balance. If your need is for the entire balance in a short period of time, or it's a relatively small amount, there's not much of a difference but if the need takes place over a material amount of time and/or the balance is high, it could be quite a material difference in interest costs.
     
  9. bt2513

    bt2513 Member

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    Credit agencies rate you higher for good behaviors across a variety of credit types. A HELOC will not hurt your credit by virtue of it being a HELOC. These are viewed similarly to a credit card in the eyes of a credit bureau. Each bank will view it a little differently in underwriting but will generally consider the maximum minimum payment in a debt repayment calculation. Furthermore, you cannot increase your score by successfully managing one debt alone.

    Banks and credit unions alike take many more factors into consideration besides your credit score. Get the loan you need, manage it well, your credit score will take care of itself and reflect your financial responsibility.

    Credit unions are subject to many of the same rules that banks are - they are just not required to pay taxes. Laws on deeds of trusts vary from state to state - the bank or credit union cannot dictate that.
     
  10. bluwoodsman

    bluwoodsman Member

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    "A HELOC will not hurt your credit by virtue of it being a HELOC. These are viewed similarly to a credit card in the eyes of a credit bureau."

    That's part of my point. You take out a heloc loan for up to a maximum amount. That max seems to be included somehow even if you do not have that much pulled out at any one time.

    That's what was explained to me by a bank some years back at least. We were looking to consolidate our credit cards and find one that had much lower interest charges. A major bank came out with a good one and we applied. Were denied.

    As is our right, we asked why. That's where the fun started. Never really received any kind of formal answer.

    The local bank managers said that one of the likely reasons was too many recent inquiries (that's where I learned that merely shopping for a car and car insurance lead to multiple "hits" on a credit report that throw up red flags to some lenders). The other was too much potential credit which inluded our 25K Heloc that we had maybe 3k out on.

    That was the banks take anyway. My credit union said that was hogwash.

    I still suspect they wanted a "better"customer. As in one they might be more likely to make money on. Credit score was over 800 at the time and we weren't known for late charges or paying off loans on a set schedule right to the end of the term (we usually pay them off early).

    The wifes score is still up there. Mine is down to 760 or so last I checked, mostly due to co-signing some college loans for the kids.
     
  11. Glowing Tubes

    Glowing Tubes Gold Supporting Member

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    HELOC, You take out what you need instead of all at once.
     
  12. bt2513

    bt2513 Member

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    A bank will usually see past the car inquiries if they know what they are doing - that's very common. They will not look past someone applying for credit cards left and right so that's usually discouraged. Each hard inquiry will usually lower your score temporarily by 3-5 points. Not a major issue, especially for an auto lender. At 740+, you are probably already getting the best deal they can negotiate.

    The credit union gave you some misleading information - not saying they were wrong but that's not the complete answer.

    Banks calculate your debt to income by taking into account outstanding balances and/or maximum credit limits on revolving credit lines (HELOCS and credit cards). Lenders have different criteria and random things they look for from institution to institution but all will consider your D/I. Credit card payments can be calculated as 3% of your outstanding balance or sometimes 2-3% of the actual credit limit - regardless of the balance. HELOCs are typically calculated at 1.5% of the overall limit or sometimes just the outstanding balance but I've found that's not the norm. This makes perfect sense because many borrowers couldn't repay their debts of their payments increased drastically - banks try to calculate a worst case scenario given what you have access to now. Like I said, some banks and credit unions have other criteria in addition to these but regulators are going to primarily look at capacity and collateral when inspecting fair lending practices.

    For the reasons above, HELOCs can sometimes "disqualify" someone from a loan product simply because the credit limits are usually much higher than what they have access to in credit cards - and each bank/credit union approaches it differently. $100k HELOC = $1500 payment factored in for most lenders, regardless of the balance.

    I used to be a lender and manager with floor authority so I dealt with these policies day in and day out. My mother happened to be on the board at our local credit union until recently. They are all considering the same basic criteria when examining applications. Like I said, there is some variation and your CU may be different but I've worked at different institutions and regulators have homogenized the market quite a bit.

    I am thankful I don't do home loans any longer :)
     
  13. bluwoodsman

    bluwoodsman Member

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    Thanks for the continued input bt2513. I probably should have said something about the factors the credit union knew about, which were a lower d/I ratio than many, long on time payment history, history of paying off a number of loans with that credit union early--and perhaps some knowledge of assets that were not reflected in salary income.

    I've been a member of several credit unions over the years, and most frankly I agree were not that much different than banks. The one I am with now stands out for their services and terms. They let us configure automatic loan payments any way we want within the limits, they have car financing that routinely beats dealers, an earned point system that can be used to drop loan interest well below the going rate for short term loans such as auto loans --they even have a car buying service with a ground breaking relationship with dealers that saves buyers thousands of dollars.

    They have some issues but I have a hard time shopping around given how easy they are to work with and the $$ they have saved us.
     

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