Standby HELOC benefits
October 25, 2019 7:49 AM Subscribe
My bank is pitching a HELOC as a source of standby liquidity. We bank at a relationship level where it wouldn’t cost us anything, other than the hard inquiry on our credit report. Is this worthwhile?
To be clear, we don’t have any current uses for the HELOC, and to be frank, we’re in the 1%. We have a fair amount of liquidity already, and plenty of life insurance.
However, having another slug of money that could be tapped at will is attractive, particularly given that there would be no fees to set it up (no closing, no paperwork, no appraisal, no credit check or other fees). Rate would be prime minus 75bps, the draw period 10 years, and the repayment period 15 years from the draw date.
It seems like a good idea to set up while we’re in a comfortable position financially. But I’m on the fence.
Have you gotten a standby HELOC in similar circumstances?
To be clear, we don’t have any current uses for the HELOC, and to be frank, we’re in the 1%. We have a fair amount of liquidity already, and plenty of life insurance.
However, having another slug of money that could be tapped at will is attractive, particularly given that there would be no fees to set it up (no closing, no paperwork, no appraisal, no credit check or other fees). Rate would be prime minus 75bps, the draw period 10 years, and the repayment period 15 years from the draw date.
It seems like a good idea to set up while we’re in a comfortable position financially. But I’m on the fence.
Have you gotten a standby HELOC in similar circumstances?
Best answer: I am in the same situation as you are top to bottom, and I have one. I've not used it to date, but it's one more tool should I need it. I consider it a combination of "extreme emergency fund" (i.e years of unemployment) and a potential way to purchase large assets without a loan on those assets. For example, in the past I've bought some houses that were borderline uninhabitable, fixed them up, and lived in them. By far the hardest part of that was getting financing - having quick cash ready to go can get you access to purchases you otherwise would not be able to make, or if you could make them it might mean selling assets with a large capital gains hit. So if you have the financial discipline to not use it when you shouldn't (a big if), I don't think there are many downsides.
The only caveat I will say is that depending on where you live you should check on the tax implications - for example in New York, you pay a "mortgage recording tax" on a new mortgage or HELOC of between 0.5% and 1.8% depending on where you live and the amount. On a heloc it's on the total line amount, not on the drawn amount. So that's a substantial up front cost - your state / country may vary.
posted by true at 8:26 AM on October 25, 2019 [5 favorites]
The only caveat I will say is that depending on where you live you should check on the tax implications - for example in New York, you pay a "mortgage recording tax" on a new mortgage or HELOC of between 0.5% and 1.8% depending on where you live and the amount. On a heloc it's on the total line amount, not on the drawn amount. So that's a substantial up front cost - your state / country may vary.
posted by true at 8:26 AM on October 25, 2019 [5 favorites]
Best answer: Cash is king. Liquidity is a form of self insurance. I have never seen anyone able to buy insurance when they need it the most. You buy insurance before their is a need for it. It is actually a funny (not haha) product in that you buy it and hope you never need/use it.
I know nothing about your family's finances and risk tolerance. There are some negatives including what true wrote above and what you cited, but there are many instances where you cannot anticipate needing the money, but do.
posted by AugustWest at 8:43 AM on October 25, 2019
I know nothing about your family's finances and risk tolerance. There are some negatives including what true wrote above and what you cited, but there are many instances where you cannot anticipate needing the money, but do.
posted by AugustWest at 8:43 AM on October 25, 2019
Best answer: We took out a HELOC several years ago to provide the upfront funding for an addition to our house, but otherwise the situation was similar to yours. (Well, okay, we're not members of the 1%, but still...) After we paid off the addition in a year, we kept the HELOC open for the duration of the draw period.
To give you an idea about its utility, here's how we used it: After our primary car was totaled in an accident, we used the HELOC to purchase a replacement and then paid the loan off once we were able to import the cash we had stashed in various online accounts. I think our total interest charge for that use of the HELOC was in the neighborhood of $30 which was well worth it for the convenience. Then, when our primary mortgage shrank small enough that it was less than the HELOC limit, we used the HELOC to pay off our mortgage (goodbye Wells Fargo!). The interest rate was lower than our mortgage so we saved a chunk of money.
While we found the HELOC to be a great advantage, it would have been problematic if we weren't disciplined about money (so we didn't have to worry about "blowing" the money it offered) or if we needed to keep our credit score as high as possible.
posted by DrGail at 8:44 AM on October 25, 2019
To give you an idea about its utility, here's how we used it: After our primary car was totaled in an accident, we used the HELOC to purchase a replacement and then paid the loan off once we were able to import the cash we had stashed in various online accounts. I think our total interest charge for that use of the HELOC was in the neighborhood of $30 which was well worth it for the convenience. Then, when our primary mortgage shrank small enough that it was less than the HELOC limit, we used the HELOC to pay off our mortgage (goodbye Wells Fargo!). The interest rate was lower than our mortgage so we saved a chunk of money.
While we found the HELOC to be a great advantage, it would have been problematic if we weren't disciplined about money (so we didn't have to worry about "blowing" the money it offered) or if we needed to keep our credit score as high as possible.
posted by DrGail at 8:44 AM on October 25, 2019
Best answer: It's hard to tell without specifics, but if you're in the 1 percent (around $500,000 annual income) and have "a fair amount of liquidity," then what kind of situation are you envisioning? At that income level, you should have enough cash to pay for a significant expense (e.g., $20,000 for home repairs) and enough marketable investments outside of retirement accounts to pay for a lot more. And if you get in a position where you want to spend a lot but not sell investments, you should at that point still be a good position to get a HELOC or borrow against your investments.
posted by Mr.Know-it-some at 9:15 AM on October 25, 2019 [3 favorites]
posted by Mr.Know-it-some at 9:15 AM on October 25, 2019 [3 favorites]
Best answer: We took out a HELOC to cover a massive un-insurance-covered home disaster and it was such a pain in the ass at the time (not just a credit check, since my bank does not carry my mortgage). that I wished we had it on standby prior to needing it. As Mr.Know-it-some points out, you are in an income tier that would allow you to gain the same level of liquidity through money management changes without having a HELOC. The other thing to thing to perhaps think about is that if you become the the victim of identity theft, that's liquid money for them too, and then you haven't just lost money, you're on the hook for it.
posted by Dr. Twist at 10:21 AM on October 25, 2019 [1 favorite]
posted by Dr. Twist at 10:21 AM on October 25, 2019 [1 favorite]
Best answer: Check the minimum years of payment without penalty clause - if you do end up tapping it, you may find yourself paying interest for 3-5 years, even if you could pay it off in the first year.
posted by Candleman at 11:01 AM on October 25, 2019 [1 favorite]
posted by Candleman at 11:01 AM on October 25, 2019 [1 favorite]
Best answer: I hope this advice is not applicable to you, but... if your partnership is in any way shaky, don't HELOC. It can be an avenue for one partner to seriously screw over the other financially.
posted by humbug at 5:32 PM on October 25, 2019
posted by humbug at 5:32 PM on October 25, 2019
Had a HELOC to help us purchase a property, and held onto it for quite a while; paid off the balance but ended up putting some other things on it and it was annoying to pay off. You have to be very disciplined to keep it from creeping upon on you--that is, don't put anything unnecessary on it, pay it off with more than the monthly payment--and I really didn't like having the lien on the house. Are you that disciplined?
I'm closing it now and the city will charge us a few hundred dollars for processing the closing, which is annoying.
posted by Peach at 1:17 PM on October 27, 2019
I'm closing it now and the city will charge us a few hundred dollars for processing the closing, which is annoying.
posted by Peach at 1:17 PM on October 27, 2019
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However, having another slug of money that could be tapped at will is attractive
That you phrase it like this tells me you shouldn't. You don't "have" that money. It's a loan. Even if you're doing well financially now, it's important to avoid letting the kind of financial thinking creep in that can cost you.
posted by praemunire at 8:07 AM on October 25, 2019 [4 favorites]