Home equity loan

[ten ocho recon scout]

I want to do some upgrades to my house and sell it. I have a good amount of equity right now, and a guy at work said his home equity line of credit is 4 percent interest, snd you only pay the interest for the first 10 years.

Im thinking of pulling 10 grand out for remodels, and when i sale it would (knock on wood) pay bsck the loan. Rough estimate would be like $70 a month for the loan.

Has anyone done something similar? Is there a bad downside im not seeing? (Obviously home prices dropping). 

As far as wasting money paying interest, i plan to list the house as soon as the remodel is done, so if it costs me a few hundred out of pocket im not worried about it.

[Brandon]

I'll respond when I'm out of the office or shoot me a PM dude.

[Brandon]

I'd need more info, but let's touch on your buddy first.

a lot of places don't do home equity lines of credit anymore since the market crash (these were a big issue when property values were soaring in the early 2000's which helped lead to the crash). also, home equity lines of credit are 2nd mortgages which have higher rates than 1st's where most banks are around 4%.....granted, based off what it looks like, he could have a 10/1 adjustable at 4%. I don't think this is what he has since it's so exotic for the market, but I wouldn't go this route anyway.

ironically, I switched shops since the rates jumped after the election and it's now a cash-out market. I do about 90% va cash-outs...which I believe you're a veteran and are likely using your entitlement or would be able to. not that I need to do your loan, but I can give you the ins and outs on the market.

here's what I would do.

you're going to sell. when I hear this from anyone I go to one thought process, keep as much money in pocket and not the banks until the home is sold.

homes are flying here in socal, so you won't have an issue. so get into something with the lowest rate and lowest payment possible.....again, keep the money in your pocket. one of the hot items I'm doing right now for sellers (it's 100% not a long term loan, I don't recommend it to non-sellers or investors) is a va 5/1 arm cash-out.

it works like your buddies, but is cash in hand whereas lines of credit work more like a credit card attached to your home. the loan is fixed for 5 years and then would adjust to whatever the market is after, which is a non-issue because you would have sold by then. the average rate I'm doing for people on this is about 2.75%......so lowest rate and lowest payment until you sell, which you would have 5 years to do so even though you'll be done with a remodel and sold way before then.

here's what else is cool, being that it's a va loan, you can take out up to 100% of the value of the home. not that you need it with only needing 10k, but the option is there once the appraisal is done.

I'm at home, but just searching around from here I can't find any 10/1 heloc's....but there are better options anyway, as you can see. maybe he wasn't a vet?

as for the negatives (to be transparent), obviously the 5 year fixed aspect. what I mean is that if you don't sell the loan adjusts to whatever the market is and by then we will probably be back to 6% range. so then you refi to a worse situation if you decide to not sell, change of plans, or whatever. I just always try to reinforce this into people as a worst case scenario when doing pros and cons. the other thing, remodels won't net you the return you think it will (or at least people that throw 60k into a kitchen and bathroom always think they'll get dollar for dollar or gain like they see on the house flipping shows).....it doesn't work like that. home values and sales are always predicated on comps in your area.

the reason why you don't get the bump expected is because appraisers only have access to your home, not your neighbors, so there is no reasonable way to value interior upgrades. the only thing that adds direct value is adding square footage. so the consensus is that remodeling is good in the sense that if all homes on a block are equal, yours will be sold first. plus, when people buy homes they generally remodel or change things anyway. they just don't get the value everyone thinks. however, with only 10k, I'm guessing you are just looking to do cleanup/repair type stuff which is good before listing.

I just like to give this heads up to because people always want to refi with the same cash-out and dump a ton of money into the home, but it's listed, priced, and people are only going to offer what comps are going for in your area. that said, where it does work in your favor is if you get a bidding war or multiple interested parties because of the work done or people just love the property. in this market with things flying pretty fast in socal, people need to come in strong with offers and upgrades won't take the value hit like elsewhere in the country.

hope this helps. let me know if you have any questions or pm me with anything. more than happy to help dude.

[Brandon]

oh yeah, out of pocket costs or costs in general. first va if you go that route:

almost everyone will have you pay your own appraisal. the max in ca per the va is $600 in ca:

http://www.benefits.va.gov/HOMELOANS/documents/docs/phoenix_fee.pdf

so plan on that. the va does also require a termite inspection (probably $100 or so) and I doubt this applies, but depending on your water, they do require a well/septic inspection....99.9% sure this doesn't apply in lb.

the va does charge a va funding fee that goes directly to them (how they fund the program and get the rates for vets), it's 3.3% of the loan amount. it's also rolled into the loan and always never comes out of pocket. you'll have minor third party costs like title, recording fees, underwriting, etc.....mostly based off loan size, but also rolled in and not out of pocket.

nothing out of pocket, just the appraisal and termite.

for conventional loans, still paying for the appraisal...maybe $500. no funding fee or termite, but will have the same third party costs and usually some lender costs (lenders know the va funding fee eats into costs for customers so they don't charge much, but on conventional loans they try to add to their margin). also, the rates even on the same adjustable 5/1 arm is probably mid-high 3's.......3.625% or so.

nothing out of pocket here, but the appraisal.

[ten ocho recon scout]

You rock Brandon. Ill shoot you a PM on my day off and get the nitty gritty down, thanks a lot bro.

[Brandon]

23 minutes ago, ten ocho recon scout said:

You rock Brandon. Ill shoot you a PM on my day off and get the nitty gritty down, thanks a lot bro.

sounds good man.

re-read my posts and one thing I forgot because I was distracted was the va funding fee. if a vet has a 10% or greater disability through active duty the funding fee is waived altogether. almost every vet knows, but I can run your Coe (certificate of eligibility) with the va and see how they have you listed for your entitlement. 

[wopphil]

TORS, I did exactly this three years ago. Here is my advice: start at a credit union. My bank, Wells Fargo, couldn't come anywhere close to matching my credit union in fees, rates and loan options. In fact, if I recall correctly, the credit union didn't even charge me an appraisal fee.

You are correct that you need only pay interest the first ten years. In my case, I then have 15 years to pay off the principal, for a total of 25 years to repay it all.

There have been no hidden fees and no downside to the loan, however the rate has been going up as the Fed has continued to raise rates. Also, in my case, I had to choose between going 80% LTV at a 4-percent rate, or 90% LTV at almost 6-percent. It didn't matter how much money I actually used - if I picked the higher loan cap/LTV, I'd pay the higher rate. I went with the lower cap/LTV.

[Brandon]

va rates and programs are different than conventional. simply going credit union isn't the best answer. I used to think usaa was solid, but compared to my company we thrash them in a lot of areas. also, three years ago the market was different and we all paid the appraisals for people....times are tough now for banks with the market shift.

you got to get the hell out of the adjustable (again, unless you plan to sell or are an investor that just refi's every 5 or 10 years and keeps the rate down for more cash flow) if the home is long term. I had to re-read your post because it sounds like your a I/O (interest only loan) and almost all of those balloon!!! those 10/1 I/O's are brutal. 

rates are only getting worse. the fed hiked the rate three times in the past year, rates took an absolute shit after the election, the bond market is erratic because of the shit they are doing in Europe, and the jobs report just came out last Friday and we ate shit again.

I'm also curious of the fine print on your loan. in the mid 2000's during the wild, wild, west there were programs above 30 years, but since the regulation changes it all kind of reverted to the old school shit....basically 30 and below.

not saying you're wrong, but we met and you're a cool dude. wouldn't want to see you in a bad situation if I could at least help out on the knowledge side.

[Adam]

We did an $88K HELOC through School's First. Our house needed a lot of work. I'll try and post some befores and afters later.

We did about $100K in upgrades last summer.

New Roof

New hardscape and landscape front and back

Exterior Stucco and Paint 

Attic redo

Front Porch + Backyard furniture 

All new windows

 

[Tank]

13 hours ago, Adam said:

We did an $88K HELOC through School's First. Our house needed a lot of work. I'll try and post some befores and afters later.

We did about $100K in upgrades last summer.

New Roof

New hardscape and landscape front and back

Exterior Stucco and Paint 

Attic redo

Front Porch + Backyard furniture 

All new windows

 

plus the trampoline.

[nate]

23 hours ago, Adam said:

We did an $88K HELOC through School's First. Our house needed a lot of work. I'll try and post some befores and afters later.

We did about $100K in upgrades last summer.

New Roof

New hardscape and landscape front and back

Exterior Stucco and Paint 

Attic redo

Front Porch + Backyard furniture 

All new windows

 

Have you noticed that window contractors are the scum of the earth?  All contractors are shady but the window contractors seem like the worst by far.

[Adam]

22 minutes ago, nate said:

Have you noticed that window contractors are the scum of the earth?  All contractors are shady but the window contractors seem like the worst by far.

I make the old lady deal with that stuff. She's a way better negotiator than I am. The windows (for the entire house) were $13K (we have 4 sliding glass doors lol). 

[Blarg]

@ten ocho recon scout what exactly do you intend to do on your house for $10k? In fix or remodel money that's barely a bathroom or painting the house. Are you sure that money is going to increase either the sale value or quickness of sale? 

 

 

[nate]

20 minutes ago, Adam said:

I make the old lady deal with that stuff. She's a way better negotiator than I am. The windows (for the entire house) were $13K (we have 4 sliding glass doors lol). 

that is less than half what we were quoted.  We have one room alone with floor to ceiling windows on three walls and one with them on 1.5 walls.  Plus they all have to be double/triple paned and insulated.

[Tank]

22 minutes ago, nate said:

that is less than half what we were quoted.  We have one room alone with floor to ceiling windows on three walls and one with them on 1.5 walls.  Plus they all have to be double/triple paned and insulated.

that's because we don't have winter out here, while you get something that requires sealskin clothing and a dogsled team to go get milk and bread.

[Catwhoshatinthehat]

I paid 3K for dual pane Milgard windows on my place but that's a town house with only one slider and not next door to the fat kid from icarly.  

[Adam]

That sonofabitch has his buddies over everynight lately. Swimming, playing music. 

[Catwhoshatinthehat]

I'm sure the window guy recognized him and tacked an extra 20-30% onto your bill.  

[ten ocho recon scout]

5 hours ago, Blarg said:

@ten ocho recon scout what exactly do you intend to do on your house for $10k? In fix or remodel money that's barely a bathroom or painting the house. Are you sure that money is going to increase either the sale value or quickness of sale? 

 

 

Literally just two bathrooms.

Im gonna do some with a friend (construction guy) for beers. Ill hire someone to do the tile for the showers.

Afger that, straight pre fab home depot sinks and cabinets. 

The bathrooms are all original, and the house is 40 years old. Thr house was a dump when i bought it, i already fixed a lot of stuff. Bathrooms are the last step.

[ten ocho recon scout]

4 hours ago, Tank said:

that's because we don't have winter out here, while you get something that requires sealskin clothing and a dogsled team to go get milk and bread.

And double doubles....

[Brandon]

side note, looked around and also asked around. still don't know anyone doing heloc's, but the overall consensus is they are probably out there like your buddy and Adam have.

to be honest dude, I'd stay away from that shit with a 10 foot pole. from asking around they are similar to your buddies and the exact same type of loan that helped cause the crash. using a combo of your buddies and Adam's scenario, paying interest only on anything sounds good because the payment is minimal.....you're basically paying to borrow money, but nothing is declining. then the 10 years are up and the heloc balloons. if they were to have a balance of 88k and not have it zeroed out by then it's an absolute disaster....I say this because over 17 years everyone says "I'll pay it off by then" or "I'll pay it like xyz to have it lowered" and that shit never happens. people get fucked. if someone can pay it off quickly or set aside 8k a year to it, but they are still paying interest, without life getting in the way (loss of job, divorce, kids, sickness, etc.) then god bless....but it rarely if ever happens. there's probably not enough fingers of everyone on this board combined to count the amount of times this shit has blown up on someone or fucked them in the long run.

or......

it still has a huge balance and needs to be refi'd before it adjusts and balloons.....what do the rates look like by then after all-time lows? and when you go to refinance that loan, you're doing the exact same cash-out loan you could have done initially! (paying off a 2nd mortgage is a cash-out refinance)

if you have the equity, just take the cash in hand. if you have leftovers payoff high interest debt like credit cards, use as a down payment on a new place, or just throw it back at the mortgage and no harm, no foul as it goes straight to principal like it was never missing.

it's also one less step that can get in the way or be an issue when you sell as it's another lien that needs to be messed with during the process of paying off.

your situation is different to where it may not matter since you're selling, but there is going to be a huge side by side comparison you'll want to see.